PT - JOURNAL ARTICLE AU - Jim Campasano TI - Portfolio Strategies for Volatility Investing AID - 10.3905/jai.2021.1.130 DP - 2021 Mar 20 TA - The Journal of Alternative Investments PG - jai.2021.1.130 4099 - https://pm-research.com/content/early/2021/03/20/jai.2021.1.130.short 4100 - https://pm-research.com/content/early/2021/03/20/jai.2021.1.130.full AB - The VIX premium, the difference between VIX futures and VIX Index levels, has been shown to have predictive power over volatility returns and investment risk. This article examines a conditional strategy applied within a portfolio construct allocating equally to market and volatility risk. Although it is predominantly short volatility, the strategy owns volatility during much of the financial crisis. Both long and short volatility allocations prove to be profitable over the sample period. They produce a portfolio with more consistent profits than the S&P 500 Index and several related volatility strategies developed in previous literature and those available as volatility-based strategy indexes.TOPICS: Derivatives, futures and forward contracts, portfolio construction, financial crises and financial market history, performance measurementKey Findings▪ From April 2007–2018, a portfolio that invests in the S&P 500 Index and VIX futures earns 1.79%, on average, each month, with a 1.02 Sharpe ratio, more than doubling the absolute and risk-adjusted returns of the S&P 500 Index.▪ The VIX premium, the difference between VIX futures and VIX Index levels, foretells investment risk and VIX futures returns. Conditioning a long or short VIX futures allocation on the VIX premium enables the portfolio to hold short VIX futures positions for most of the time and long VIX futures positions during turbulent periods. Both long and short VIX futures investments earned positive returns, and the portfolio outperformed related strategies over the entire period and each subsample.▪ The portfolio posts positive returns during the financial crisis by holding long VIX futures positions. In 2008, the portfolio earns 39.87%, while the S&P 500 Index lost 37.00%.