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Volatility as an Asset Class: Holding VIX in a Portfolio

Hedging market downturns without sacrificing upside has long been sought by investors. If VIX was directly investable, adding it as a hedge to the S&amp;P 500 would result in significantly improved performance over the equity only portfolio. However, tradable VIX products do not provide the hedge or returns investors seek over long-term horizons. Alternatively, deconstructing VIX to find the key S&amp;P 500 options which drive VIX movements leads to a synthetic VIX portfolio that provides a more effective hedge. Using these options captures correlations and returns similar to VIX, and combined with the S&amp;P 500, outperforms the buy-and-hold index portfolio.