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Hedging With Volatility

A risk-averse investor with a long equity position is presumably interested in identifying a hedging strategy that protects the value of that investment. The common approach encompasses using either financial derivatives or holding assets (such as gold or Swiss francs) as portfolio hedges as they show negative correlation with equities. This paper proposes using volatility indexes as portfolio hedges instead; it shows that a volatility-based dynamic hedging strategy is the most effective at protecting the value of an equity investment.