Gyroscopic Investing

There's an interesting ETF that's based on the Vector Index by the ticker PHDG. Basically, in high volatility times, it longs VIX futures, in low volatility times it's long the S&P 500...with a safeguard in place to go all cash if it loses more than 2% value in X days (5 days was it?).

Anyway, if you look at the performance of VQT since 2010 (the higher-fee ETN predecessor of PHDG), it performed like a smoother version of the S&P500, doing exactly as it was supposed to during dips...and the same methodology backtested over 2008 shows big gains while the S&P 500 was tanking.

The downsides of PHDG that I can see are:

• Short history that's possibly curve fit to recent market conditions
• Underperformance during bull markets due usually maintaining a small VIX position instead of 100% S&P

If you can get over the short history, the under-performance during bull markets seems to be easily remedied by using leverage. As an aside, this article shows some interesting stats that PHDG @ 1.25x + SPY basically outperforms SPY with less volatility: http://seekingalpha.com/article/1778142 ... ging-tools

So anyway, if PHDG with leverage turns out to be the smoother, better performing version of SPY in the future, then using it for the stock portion of the PP seems like it might work out well.

Thoughts?

Sam Brazil wrote: Thoughts?

There's a variety of tail-risk hedging index approaches being cooked up in the financial engineering kettle, but being long the VIX is one of the worst because of contango and tracking error (VIX is not directly investable at spot).  However, only a very few of these tail-risk heding strategies are in investable form yet anyway.  I posted about one somewhere else on the forum that isn't investable yet: https://indexes.nasdaqomx.com/Index/Overview/NQIBIST

The tricky thing about when you start morphing the PP into a tactical allocation strategy is the co-dependence of all the assets to each other starts to break down.  For instance, if you've been hedging stocks because they're at the juncture of being in an overvalued QEternity bubble for a couple of years, the missing gains is critical to offset losses incurred in the other three assets.  The only way it will work is to have all four assets working on a tactical basis.

The PP has its own built-in tail risk hedging with the bonds and gold.  Don't overlook that.