Building a Long Volatility Strategy without Using Options

A systematic approach to creating portfolio protection 

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


  • Long volatility strategies can be built without using options
  • Our systematic approach has used exclusively currencies and bonds
  • Investors can achieve attractive diversification benefits with such strategies


The insurance policy is one of the game-changing products of our civilization as the individual is protected against great financial harm by the rest of society. Everyone understands the concept and accepts paying premiums to insure their house, their car, or their health. There seem few limitations to what can be insured. For example, Lloyds of London has apparently sold more than 20,000 policies against alien abductions.

Investors are constantly concerned about hedging their portfolios, but the willingness to buy insurance seems lower than for their home or car. Most aim to insure their portfolios via diversification but expect the diversifying strategy to also make money. Bonds have worked wonderfully for achieving this objective in recent decades, while most hedge funds have failed to provide such uncorrelated and positive returns.

Long volatility strategies represent one of the closest approximations to an insurance policy for an equity portfolio as volatility usually spikes when stock markets crash. However, like an insurance, the strategy tends to lose money consistently across years before a payoff occurs.

Furthermore, long volatility strategies are often created via complex option portfolios, which are difficult to understand and make investors wary. If these strategies could be created with simpler instruments, then perhaps this would increase investors’ interest in them.

In the research note, we will explore building a systematic long volatility strategy without using options.


There are many approaches to creating a systematic long volatility strategy. We are using a simple approach that measures the correlation of various asset class indices when then VIX spiked significantly between 2006 and 2021, which results in a sample of 13 observation periods. The set of 59 indices essentially represents all available asset classes – equities, bonds, commodities, and currencies.