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S&P Dow Jones Volatility Indices Performance

Tim Edwards
November 30, 2015

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S&P Volatility Indices


600%

500%

400%

300%

200%

100%

0%
11-2006

11-2007

11-2008

11-2009

11-2010

11-2011

11-2012

11-2013

11-2014

S&P 500 (TR)

S&P 500 Dynamic VEQTOR Index

S&P 500 VIX Mid-Term Futures

S&P 500 Dynamic VIX Futures

S&P 500 VEQTOR Switch

S&P 500 VIX Short-Term Futures

Source: S&P Dow Jones Indices LLC. Data as of November, 2015. Total return index in USD. Chart is provided for illustrative purposes. Past performance is no guarantee of future results. These
charts and graphs may reflect hypothetical historical performance. Please see the Performance Disclosure at the end of this document for more information regarding the inherent limitations
associated with back-tested performance.

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Live Performance
S&P 500 VIX Short-Term Futures Index: Jan 2009 Nov 2015

-99.67%

Source: S&P Dow Jones Indices LLC. Data as of November, 2015. Total return index in USD. Chart is provided for illustrative purposes. Past performance is no guarantee of future results.
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Outline
Investable Volatility
Features of volatility as a hedge

Increasing focus on volatility risk premia


How much contango is normal?
Applications to indices and ETFs

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Section 1: Drivers of Demand for Long Volatility Exposures

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Negative Correlation
S&P 500 VIX Short-Term Futures Index: Live Performance Jan 2009 Nov 2015
100,000,000
10,000,000

3000

1,000,000
100,000
10,000
1,000
100

300

Jan Jun Nov Apr Sep Feb Jul Dec May Oct Mar Aug Jan Jun Nov Apr Sep
2009 2009 2009 2010 2010 2011 2011 2011 2012 2012 2013 2013 2014 2014 2014 2015 2015
S&P Short Term VIX Futures (Left Axis, Logarithmic)

S&P 500 (Right Axis, Logarithmic)

Source: S&P Dow Jones Indices LLC. Data as of November, 2015. Total return index in USD. Chart is provided for illustrative purposes. Past performance is no guarantee of future results.

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Major Event Performance


Performance of the S&P 500 VIX Short-Term Futures Index selected dates
Year

Dates

Event

Index

2006

10 May - 14 Jun

U.S. inflation scare

+ 61%

2007

19 Jun - 16 Aug

Bear Sterns HF liquidated

+ 97%

2008

19 Sep - 19 Nov

Lehman Bankruptcy

+ 264%

2010

23 Apr - 20 May

Flash Crash

+ 87%

2011

22 Jul - 22 Sep

Debt Ceiling Crisis & U.S Downgrade

+ 141%

2012

26 Mar - 18 May

Euro / Greek Debt Crisis

+ 47%

2013

07 May - 24 Jun

Taper tantrum

+ 26%

2014

18 Sep - 15 Oct

ECB disappoints on stimulus

+ 58%

2014-5

05 Dec - 15 Jan

Russian equity collapse

+ 40%

2015

10 Aug - 01 Sep

Chinese market crash / global uncertainty

+ 96%

Source: S&P Dow Jones Indices LLC. Data as of November, 2015. Total return index in USD. Table is provided for illustrative purposes. Past performance is no guarantee of future results. These
charts and graphs may reflect hypothetical historical performance. Please see the Performance Disclosure at the end of this document for more information regarding the inherent limitations
associated with back-tested performance.
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Convexity
S&P 500 VIX Short-Term Futures Index versus S&P 500 (Dec 2005 Nov 2015)
S&P Short-term VIX Futures Index TR
21-trading day % change

200%

150%

100%

50%

0%

-50%
-40%

-30%

-20%

-10%

0%

10%

20%

30%

S&P 500 - 21 trading day % change


Source: S&P Dow Jones Indices LLC. Data as of November, 2015. Total return index in USD. Chart is provided for illustrative purposes. Past performance is no guarantee of future results. These
charts and graphs may reflect hypothetical historical performance. Please see the Performance Disclosure at the end of this document for more information regarding the inherent limitations
associated with back-tested performance.
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Persistence of Diversification Effects


Correlations between the S&P 500 and various indices, past 10 years

24M Trailing Correlation to S&P 500


(Dec 2005 Nov 2015)

S&P Developed BMI


S&P Europe 350
S&P Emerging BMI
S&P GSCI
S&P GSCI Gold
S&P 30Yr U.S. Treasury Futures
U.S. Dollar Index
S&P 500 VIX Short-Term Futures Index

Ave

Max

1.0
0.9
0.8
0.5
0.1
-0.3
-0.5
-0.8

1.0
0.9
0.9
0.9
0.5
0.2
0.2
-0.7

Source: S&P Dow Jones Indices LLC. Data as of November 30, 2015. All index performance considered was total return index in USD. Table provided for illustrative purposes. Past performance
is no guarantee of future results. These charts and graphs may reflect hypothetical historical performance. Please see the Performance Disclosure at the end of this document for more information
regarding the inherent limitations associated with back-tested performance.

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Demand expression via ETPs


AUM in the six largest volatility-only exchange traded products Jan 2009 Nov 2015
Top 6 Volatility ETP Assets ($ bns)

4.5
4.0
3.5
3.0

2.5
2.0
1.5
1.0
0.5

0.0
Jan Aug Mar Oct May Dec Jul Feb Sep Apr Nov Jun
2009 2009 2010 2010 2011 2011 2012 2013 2013 2014 2014 2015
Source: S&P Dow Jones Indices LLC, Barclays Capital, ProShares, Credit Suisse / Velocityshares. Data as of November, 2015. Chart is provided for illustrative purposes. Past performance is no
guarantee of future results.

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10

Section 2: Longer Term Performance

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11

HY Returns
S&P 500 VIX Short-Term Futures Index: years & quarters (Dec 2006 Nov 2015)
Full Year Total Return

Q1

Q2

Q3

Q4

2007

43%

0%

-3%

27%

16%

2008

126%

12%

-22%

23%

109%

2009

-65%

17%

-40%

-27%

-32%

2010

-72%

-37%

49%

-45%

-46%

2011

-10%

-21%

-29%

157%

-38%

2012

-76%

-50%

-16%

-35%

-14%

2013

-66%

-35%

0%

-27%

-27%

2014

-26%

-1%

-32%

10%

1%

2015 (to date)

-41%

-18%

-21%

28%

-29%

Source: S&P Dow Jones Indices LLC. Data as of November, 2015. Total return index in USD. Table is provided for illustrative purposes. Past performance is no guarantee of future results. These
charts and graphs may reflect hypothetical historical performance. Please see the Performance Disclosure at the end of this document for more information regarding the inherent limitations
associated with back-tested performance.

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12

Short Volatility
250%

200%

150%

Notional Short Position


100%

S&P 500 VIX Short-Term Futures


50%

0%
01-2009

01-2010

01-2011

01-2012

01-2013

01-2014

01-2015

Source: S&P Dow Jones Indices LLC. Data as of November, 2015. Total return index in USD. Hypothetical short position does not reflect transaction costs,, borrowing costs and is not intended to
reflect a realistic investment strategy. Chart is provided for illustrative purposes only. Past performance is no guarantee of future results.

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13

Short Volatility - Rebalanced


S&P 500 VIX Short-Term Futures Inverse Daily Index: Dec 2006 Nov 2015
450
400
350
300
250
200

150
100
50
0
Jan Aug Mar Oct May Dec Jul Feb Sep Apr Nov Jun Jan Aug Mar Oct May
2006 2006 2007 2007 2008 2008 2009 2010 2010 2011 2011 2012 2013 2013 2014 2014 2015
Source: S&P Dow Jones Indices LLC. Data as of November, 2015. Total return index in USD. Chart is provided for illustrative purposes. Past performance is no guarantee of future results. These
charts and graphs may reflect hypothetical historical performance. Please see the Performance Disclosure at the end of this document for more information regarding the inherent limitations
associated with back-tested performance.

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Permission to reprint or distribute any content from this presentation requires the written approval of S&P Dow Jones Indices.

14

Section 3: VIX Futures Term Structure Dynamics

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15

Contango: Example
VIX Futures Term Structure as of 4th November, 2013
20
19

18.6

18

19.0

19.3

19.6

18.1

17

17.5

16

16.5

15

15.1

14
14.0

13

12

12.9
Spot Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14

Source: CBOE. Chart is provided for illustrative purposes. Past performance is no guarantee of future results.

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16

Contango Hypothetical Attribution

80 Historical Max 80.86

Demand for
Short VIX
Futures

Major
Event?
Reversion
to mean?

VIX
Future
No
Change?

Long-Term
Average

Arbitrage
Channel

Always > 0

Source: S&P Dow Jones Indices LLC. Provided for illustrative purposes only.

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Next VIX
Future

= Previous Future
expected change
demand premium

subject to arbitrage
bounds

Demand for
Long VIX
Futures
17

What Drives Performance?


Correlations of changes in the S&P 500 VIX Short-Term Futures Index to changes in
the VIX index, and to futures curvature (Feb 2009 Nov 2015)

Correlation to S&P 500 VIX Short-Term Futures


Index Return

1.00

VIX Index
0.90

Average 1st vs 2nd Future contango over period

0.87
0.82

0.80

0.86

0.64

0.60

0.60
0.46

0.40

0.20

0.02
0.00

1 Day

1 Month

1 Quarter

1 Year

Source: S&P Dow Jones Indices LLC. Data as of November, 2015. 1st to 2d Futures Contango is the average percentage difference taken over the performance measurement period between the then-current first and second monthly future from expiry. Performance is total return index in USD. Chart is provided for illustrative purposes. Past performance is no guarantee of
future results.
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18

Section 4: Supply / Demand Dynamics

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19

Linear Regression
Historical 1st & 2nd VIX Futures Prices, Daily (Jan 2009 Nov 2015)
60
50

y = 0.9336x + 2.5006

40
2nd Future 30
20
10
0
0

10

20

30
Front Future

40

50

60

Source: CBOE. Chart is provided for illustrative purposes. Past performance is no guarantee of future results.

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20

Consequences of Linearity
VIX Futures as current mean reversion premium
F2 = 0.9333 F1 + 2.5
= F1 + (1/15)*( 20 F1) + 1.14
Equation describes mean reversion to 20 (at 1/15 per month) plus 1.14 premium

Current prices compared to those predicted by linear regression


(Loosely) defines the current premium, and tell if it is above/below average

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21

Reality Check
S&P 500 VIX Short Term Futures Index performance interpreted
Total return January 30, 2009 to November 17, 2015 of -99.67%

VIX from 44.84 to 18.84 (fall of 58%) over the same period
Adjusted performance of -99.22%, equivalent to -5.78% per month
-5.78% x 21 (average VIX Futures price) = 1.20 VIX points (vs 1.14 estimated)
Sources: S&P, CBOE. Past performance is no guarantee of future results.

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22

Historical Premium
Approximation to the premium in near VIX futures
6
4
2
0
-2

-4
-6
-8
-10
Feb
2006

Feb
2007

Feb
2008

Feb
2009

Feb
2010

Feb
2011

Front Future Price > 35

Feb
2012

Feb
2013

Feb
2014

Feb
2015

Model-implied premium

Source: S&P Dow Jones Indices LLC, CBOE. Data as of November, 2015. Model implied premium is a trailing 21-day average of the difference between the price of the then-current 2nd VIX
Future and that approximated by the model, i.e. 87.5% of the then-current 1st VIX Future, plus 2.5. Chart is provided for illustrative purposes. Past performance is no guarantee of future results.

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23

Net VIX ETP Exposures

Top 6 Volatility ETP Assets ($ bns)

Accounting for inverse and leveraged VIX exchange-traded products


4.5
4.0
3.5

ETP total assets


Net Exposure (accounting for leverage)

3.0
2.5
2.0
1.5

1.0
0.5
0.0

Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul
2009 2009 2010 2010 2011 2011 2012 2012 2013 2013 2014 2014 2015 2015
Source: S&P Dow Jones Indices LLC, Barclays Capital, ProShares, Credit Suisse / Velocityshares. Data as of November, 2015. Chart is provided for illustrative purposes. Past performance is no
guarantee of future results.

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24

ETP Net Assets and Futures Premium


5.0
Model Implied
Premium
4.0

3.5
3

3.0

Net ETP Exposure


(adjusted for leverage,
$bns)

2.5

2.0

1.0

1.5

0.0

-1.0
-2.0

0.5

-3.0

Jan Sep May Jan Sep May Jan Sep May Jan Sep
2009 2009 2010 2011 2011 2012 2013 2013 2014 2015 2015
Model-Implied Premium (Left Axis)

Net Exposure ($bn, Right Axis)

Source: S&P Dow Jones Indices LLC, Barclays Capital, ProShares, Credit Suisse / Velocityshares as of November 2015. Chart is provided for illustrative purposes. Past performance is no
guarantee of future results.

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25

Conclusions
VIX Futures indices
Potentially attractive hedging properties; yet poor performance 2009-2015

Different drivers dominate long-term returns than short-term returns


As demand changes, the past may become particularly poor guide to the future
Current marketplace suggests a balance between long and short demand for ETPs

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26

THANK YOU
Contact Us
Tim Edwards, PhD
tim.edwards@spdji.com

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27

PERFORMANCE DISCLOSURE
The S&P 500 VIX Short Term Futures Index and the S&P 500 Mid-Term Futures Index were launched on December 22, 2008; The S&P 500 VIX Short Term Futures Inverse Daily Index was
launched on August 5th, 2012. All information presented prior to the launch date is back-tested. Back-tested performance is not actual performance, but is hypothetical. The back-test calculations are
based on the same methodology that was in effect when the index was officially launched. Complete index methodology details are available at www.spdji.com. It is not possible to invest directly in
an index.
S&P Dow Jones Indices defines various dates to assist our clients in providing transparency on their products. The First Value Date is the first day for which there is a calculated value (either live or
back-tested) for a given index. The Base Date is the date at which the Index is set at a fixed value for calculation purposes. The Launch Date designates the date upon which the values of an index
are first considered live: index values provided for any date or time period prior to the indexs Launch Date are considered back-tested. S&P Dow Jones Indices defines the Launch Date as the date
by which the values of an index are known to have been released to the public, for example via the companys public website or its datafeed to external parties. For Dow Jones-branded indicates
introduced prior to May 31, 2013, the Launch Date (which prior to May 31, 2013, was termed Date of introduction) is set at a date upon which no further changes were permitted to be made to the
index methodology, but that may have been prior to the Indexs public release date.
Past performance of the Index is not an indication of future results. Prospective application of the methodology used to construct the Index may not result in performance commensurate with the
back-test returns shown. The back-test period does not necessarily correspond to the entire available history of the Index. Please refer to the methodology paper for the Index, available at
www.spdji.com for more details about the index, including the manner in which it is rebalanced, the timing of such rebalancing, criteria for additions and deletions, as well as all index calculations.
Another limitation of using back-tested information is that the back-tested calculation is generally prepared with the benefit of hindsight. Back-tested information reflects the application of the index
methodology and selection of index constituents in hindsight. No hypothetical record can completely account for the impact of financial risk in actual trading. For example, there are numerous factors
related to the equities, fixed income, or commodities markets in general which cannot be, and have not been accounted for in the preparation of the index information set forth, all of which can affect
actual performance.
The Index returns shown do not represent the results of actual trading of investable assets/securities. S&P Dow Jones Indices LLC maintains the Index and calculates the Index levels and
performance shown or discussed, but does not manage actual assets. Index returns do not reflect payment of any sales charges or fees an investor may pay to purchase the securities underlying the
Index or investment funds that are intended to track the performance of the Index. The imposition of these fees and charges would cause actual and back-tested performance of the securities/fund to
be lower than the Index performance shown. As a simple example, if an index returned 10% on a US $100,000 investment for a 12-month period (or US $10,000) and an actual asset-based fee of
1.5% was imposed at the end of the period on the investment plus accrued interest (or US $1,650), the net return would be 8.35% (or US $8,350) for the year. Over a three year period, an annual
1.5% fee taken at year end with an assumed 10% return per year would result in a cumulative gross return of 33.10%, a total fee of US $5,375, and a cumulative net return of 27.2% (or US $27,200).

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28

GENERAL DISCLAIMER
Copyright 2015 by S&P Dow Jones Indices LLC, a part of McGraw Hill Financial. All rights reserved. Standard & Poors and S&P are registered trademarks of Standard & Poors Financial Services
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LLC. Redistribution, reproduction and/or photocopying in whole or in part are prohibited without written permission. This document does not constitute an offer of services in jurisdictions where S&P
Dow Jones Indices LLC, Dow Jones, S&P or their respective affiliates (collectively S&P Dow Jones Indices) do not have the necessary licenses. All information provided by S&P Dow Jones Indices
is impersonal and not tailored to the needs of any person, entity or group of persons. S&P Dow Jones Indices receives compensation in connection with licensing its indices to third parties. Past
performance of an index is not a guarantee of future results.
It is not possible to invest directly in an index. Exposure to an asset class represented by an index is available through investable instruments based on that index. S&P Dow Jones Indices does not
sponsor, endorse, sell, promote or manage any investment fund or other investment vehicle that is offered by third parties and that seeks to provide an investment return based on the performance of
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decision to invest in any such investment fund or other investment vehicle should not be made in reliance on any of the statements set forth in this document. Prospective investors are advised to
make an investment in any such fund or other vehicle only after carefully considering the risks associated with investing in such funds, as detailed in an offering memorandum or similar document
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29