Manager: Focal Point Management
Model: Volatility and Tactical Opportunity
Disclosures: XIV, UVXY
The Volatility and Tactical Opportunity portfolio aims to benefit from the up and down swings of market volatility. Volatility, as measured by the VIX, tends to be mean reverting over time (when volatility goes down, it will have a tendency to climb higher in the very short term).
When volatility trends higher, the Volatility and Tactical Opportunity portfolio aims to benefit from potentially lower short term volatility by buying short volatility ETFs such as VelocityShares Daily Inverse VIX Short-Term (XIV). When short term volatility goes down, there is a tendency for long term volatility to swing higher, and the portfolio aims to benefit by purchasing long volatility ETFs such as ProShares Ultra VIX Short-Term (UVXY).
2012 has been a robust year for our Volatility and Tactical Opportunity portfolio, as there have been significant moves in both directions for volatility. June, however, was a more difficult period, as volatility came down significantly and stayed low.
Our volatility based portfolio was not as well positioned to benefit from a more tranquil period of volatility, and our positions in UVXY and XIV lost ground as our signals indicated a more volatile period of activity was to be expected.
As we head into the summer, our models indicate the currently lower volatility will likely stay for a period of time, and the model remains positioned to benefit from reduced to flattish volatility and will remain so until conditions change. So, as of the end of June, we remain in XIV (short volatility) positions until conditions warrant a change.
