Building a Long Volatility Strategy without Using Options – III

A systematic approach to creating portfolio protection

August 2021. Reading Time: 10 Minutes. Author: Nicolas Rabener.


  • Long volatility strategies can be built without using options
  • Securities can be selected on different risk metrics like the VIX or high yield spread
  • Although portfolios differ, the strategies exhibited similar trends


We started our exploration of long volatility strategies by analyzing the Eurekahedge Long Volatility Hedge Fund Index and highlighted that this would have provided investors with attractive diversification benefits since 2004. However, the index suffers from survivorship bias and requires investors to conduct due diligence on mostly complex option-based strategies, which are rather unattractive features (read Building a Long Volatility Strategy without Using Options).

Manager selection is already difficult when comparing fund managers pursuing simple U.S. large-cap strategies, and it does not become easier with higher complexity. Given this, we investigated creating systematic and simple long volatility strategies without using options. The approach was to select asset classes based on their correlation to the VIX, which resulted in portfolios primarily comprised of certain currency pairs and government bonds.

However, the VIX is a difficult time series to work with given its extreme volatility and limited data history. It has caused the downfall of many models and managers. In this research note, we will explore other risk indicators for creating a systematic long volatility strategy without using options.


We continue to use the same framework as in our previous research papers and select securities from a set of 59 indices that essentially comprises all available asset classes – equities, bonds, commodities, and currencies. The security selection process focuses on selecting the top 5% of indices, i.e. three securities that are most highly correlated to risk sentiment. We use a one-year lookback for calculating the correlation and use the securities from a week ago to achieve a realistic strategy implementation (read