"Volatility is Not an Asset Class"

The WSJ had a blog post further detailing the peculiar odyssey of the Velocity Shares Daily 2x VIX Short Term ETN (TVIX). A lengthy part of the post was devoted to the thoughts of one portfolio manager who among other things said that volatility is an indicator not an asset class.

The chart shows a spectacular implosion in the price of the shares. As mentioned last week the crazy action is mostly about a disruption in the normal creation/redemption process. There are several types of glitches/malfunctions that can create serious problems but this event seems to be especially remarkable for the number of buzzwords this fund takes in; ETN, leveraged, futures, VIX.

There is probably no way to know what portion of the volume or AUM in TVIX is for speculation and what portion is from hedging with the hedge idea being as stocks go down the VIX will go up and a 2x VIX will go up more.

The idea with speculating on VIX in one form or another is that the VIX moves around a lot in both directions which makes for good action for speculative trading.

The idea of volatility being an asset class would seem to be in the context of building a portfolio that includes alternative asset classes that have low correlations to equities. This could be thought of along the lines of market neutral funds, absolute return funds, merger arbitrage funds and any other number of so called hedge fund-like products.

TVIX is not the only VIX product with questionable benefit. The troubles with VXX have been widely written about so you can google this for more info but Google Finance shows VXX is down 96% in a little over three years. The problem with VXX as I understand it is that contango keeps eating away at the fund, it already had a 1 for 4 reverse split about a year and half ago.

VXX is meant to track VIX futures and I believe it does that, it has not worked out as a holding because of the dynamics of the futures curve for the underlying. TVIX has layered on top of that the disruption of creations which is internal to the provider.

I wrote about VXX three years ago and did not think it would be ideal as a hedge because there are so many variables in that market but I had no idea how bad it would be. One thing I have always said about these products is that if you are going to use them that you do so in moderation. TVIX is down a little over 50% in the last week. If you put 2% into this fund at the worse possible time then you have a 100 basis point drag on your portfolio which might aggravate you but will not be the reason that anyone would need to delay their retirement.

A little bigger picture, I've been writing about ETPs for a long time now with the same general optimistic tone which is bring these types of ideas, let the market decide if they have any utility and for any new products that you might actually want to buy that you should watch it for a while and then go in small. TVIX is a great example of why I say this. It strikes me as a disastrous product launch but the magnitude of the disaster falls squarely on the shoulders of anyone who used it.