Long Volatility Strategies: Hedge Funds vs DIY

Replicating Masters of the Universe  

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


  • Long volatility exposure is typically achieved via hedge funds
  • A simple DIY strategy would have generated similar attractive diversification benefits
  • Most of the returns are explained by risk-off currencies, government bonds, and gold


Do-it-yourself is the best and worst financial advice for retail investors. On the one hand, retail investors are not particularly good investors and perhaps should not invest on their own at all. For example, the trading platform eToro, which has more than 20 million users in over 100 countries, discloses that 67% of their self-trading clients lose money.

On the other, most retail investors would have generated higher returns in recent years if they invested themselves into index ETFs versus trusting capital to financial advisors or mutual fund managers.

The evidence is less clear for institutions considering replicating complex strategies themselves instead of hiring dedicated managers. Most hedge funds provide not much more than factor exposure and theoretically can be replaced with cheap risk premia indices, but only a minority of institutional investors have done so.

Long volatility strategies are particularly complex given primarily option-based portfolios, which makes fund manager due diligence and monitoring more expensive. The number of fund managers is also limited. A do-it-yourself approach might be attractive for institutional investors.

In this research note, we will compare long volatility strategy hedge funds versus a systematic replication. 


We use the CBOE Eurekahedge Long Volatility Hedge Fund Index as the benchmark for long volatility hedge funds. The index has 10 equal-weighted constituents, which includes some of the best-known managers from this space.

For the do-it-yourself (DIY) strategy we measure the correlation of 59 asset class indices to the VIX and select the 10% with the highest correlation. The resulting portfolio was primarily comprised of risk-off currencies, eg USD/CAD, and government bonds. Implementation would be efficient and cheap via futures (read