This purpose of this post is not to bash certain supposed trading gurus who were so incredibly stupid as to lose money owning TVIX when it was trading at a nearly 100% premium to its NAV (for the pedants, yes I know that ETNs don’t technically have NAVs — they have indicative values, but those function the same way as NAV — it is the value of the underlying asset or derivative contract). Learn more about TVIX at the VelocityShares website. (Speaking of TVIX, I would be chary of buying any product that has scores of references in its prospectus to when (not if) its value reaches $0.)
No, this post is just to let people know that using VIX futures and ETNs based on it for hedging a long stock portfolio is not the best idea. From a paper just posted to SSRN a few days ago (emphasis mine):
Exchange-traded products (ETPs) linked to futures contracts on the CBOE S&P 500 Volatility Index (VIX) have grown in volume and assets under management in recent years, in part because of their perceived potential to hedge against stock market losses.
In this paper we study whether VIX-related ETPs can effectively hedge a portfolio of stocks. We find that while the VIX increases when large stock market losses occur, ETPs which track short term VIX futures indices are not effective hedges for stock portfolios because of the negative roll yield accumulated by such futures-based ETPs. ETPs which track medium term VIX futures indices suffer less from negative roll yield and thus appear somewhat better hedges for stock portfolios. Our findings cast doubt on the potential diversification benefit from holding ETPs linked to VIX futures contracts.
The paper is Are VIX Futures ETPs Effective Hedges? by Deng, McCann, and Wang. See the full abstract and download the paper at SSRN.