There’s been a lot of discussion around volatility as an asset class recently. When you take a 60/40 balanced portfolio and start plugging in an allocation to the VIX from 1-10% you see a significant benefit to holding an allocation up to 10%.
The problem is in practice, as Ohai mentioned, it’s very difficult to implemnt inexpensively. Once you practically apply VIX futures (medium-term futures) into the mix with a balanced portfolio you do significantly reduce risk, but performance also suffers.
But, there are several different ETFs and ETNs that link to VIX futures, all with different term structures, underlying indecies, leverage, long vs short, rolldown exposure, reactivity to volatility, and expenses. Bascially, you need somone that really knows what they’re doing to managing volatility as an asset class.
Currently VIX linked ETFs/ETNs are being used in several global allocation funds and target date retirement funds (those at or near their retirement date). The issue is far from settled, but the majority opinion is it’s an okay insurance policy for a well diversified portfolio. Just don’t try it yourself unless you really know what you’re doing.
I wish I could link to this presentation I’m viewing. It’s something that was presented at a Morgan Stanley conference last year. Good stuff.