FEBRUARY 2012

KEY TOOLS FOR HEDGING AND TAIL RISK MANAGEMENT

EXECUTIVE SUMMARY OF KEY HIGHLIGHTS
Tail Risk in the Past 25 Years: Since mid-1986 the worst monthly
declines for select indexes include: down 28.2% for the S&P GSCI
Index, down 21.5% for S&P 500, down 20.2% for MSCI EAFE, and
a decline of only 8.6% for the CLL Index (Exhibit B).
Tail Risk and Diversification in 2008: Changes for indexes in 2008 S&P 500 down 37.0%; two indexes with options and stocks - CLLSM
down 23.6% and VXTHSM down 19.3%; three futures-based indexes
(with no stock positions) -- VXMT, DyVX and VTRsk, respectively
increased 83.9%, 132.3% and 174.3% (Exhibit A).

Enhanced Returns for Portfolios: Portfolios with small allocations to

the futures-based indices and the VXTH had higher returns (and lower
volatility) than the S&P 500. The annualized returns over the past 70
months were 2.4% for the S&P 500; 3.4% for a portfolio of 20% VXTH
and 80% S&P 500; and 6.0% for a portfolio of 10% VTRsk (or 10%
DyVX) and 90% S&P 500 (Exhibits I and O).
Higher Risk-adjusted Returns: Certain portfolios with the VXTH and
the future-based indexes have had a higher Sortino Ratio than key stock
indices over the last 70 months (Exhibits F and L).

Lower Volatility: The CLL has incurred about 70% of the volatility of
the S&P 500 over the last 26 years. Select portfolios with the VXTH and
the future-based indexes have had less volatility than the S&P 500 over
the last 70 months (Exhibits C, F, and O).

BENCHMARK INDEXES

This article analyzes five benchmarks that are designed to provide protection during declining equity markets (visit www.cboe.com/benchmarks and
www.spvixviews.com/indices for more details).

Exhibit A: Benchmark Indexes

Annual % Return
Ticker
Options or Futures Position(s)
(Bloomberg)

Index
CBOE S&P 500 95-110

Hold
stocks?

Price History
Begins

2008

2009

2010

2011

CLL
<Index>

Buys three-month out-of-the-money S&P 500 put options at 95% of the S&P 500 value. Sells
one-month out-of-the-money S&P 500 call options at 110% of the S&P 500 value.

S&P 500

June 1986

-23.6%

17.6%

4.1%

-8.8%

CBOE VIX Tail Hedge

VXTH
<Index>

Buys one-month 30-delta VIX call options. The weight of the VIX calls in the portfolio varies
at each roll depending on the perceived likelihood that a "black swan" event could occur in
the near future.

S&P 500

March 2006

-19.3%

16.0%

21.1%

5.9%

S&P 500 VIX Mid-term

SPVIXMTR
<Index>

Buys a combination of VIX futures positions in order to reflect the expectations of the VIX
Index level in 5 months. Some of the VIX futures are rolled daily in order to maintain a
constant average weighted five-month term.

No stocks

Dec. 2005

83.9%

-23.6%

-13.2%

-7.6%

SPDVIXT
<Index>

Buys a combination of VIX futures positions in order to reflect dynamic allocation between
the S&P 500 Short-Term VIX Futures Index and S&P 500 Mid-Term VIX Futures Index. The
rules-based allocation is done with the goal of aiming to lower the roll cost of investments
linked to future implied volatility.

No stocks

Dec. 2005

132.3%

0.7%

20.7%

8.8%

SPVXTRST
<Index>

Calculated using a weight of 45% of 2x the S&P VIX Short-Term Futures Index and 55% of
the Inverse S&P 500 Short-Term Futures Index. The goal of the index is to provide a long
volatility exposure whose cost is partially or completely mitigated (due to negative roll yield)
via a rebalanced short exposure.

No stocks

Dec. 2005

174.3%

-21.0%

-3.0%

10.1%

S&P 500

Jan. 1970

-37.0%

26.5%

15.1%

2.1%

Collar Index

(CLL)

Index (VXTH)

Futures Index

(VXMT)

S&P 500 Dynamic VIX

Futures Index (DyVX)

S&P 500 VIX Futures Tail
Risk Index - Short Term

(VTRsk)

S&P 500 Index

(Total Return)

SPTR
<Index>

None

COLLAR OVER MORE THAN 25 YEARS

Exhibit B: Histogram with Frequency of Monthly Returns for

CLL and S&P 500 (July 1986 - January 2012)

CLL had only 1 month with

losses of 8% or below.

9%

Annualized Return

80

73
59

60

40

40

2624
2

1 0

0 0

00

16% - 20%

20% - 24%

-16% - -12%

11
1
0% - 4%

-20% - -16%

10

-4% - 0%

10

-8% - -4%

1 0

-12% - -8%

10
-24% - -20%

20
0

10% BXM

103

12% - 16%

100

10%

124

8% - 12%

120

137

S&P 500
CLL

4% - 8%

140

Exhibit C: Returns and Volatility (July 1986 January 2012)

Exhibit B: Since mid-1986 the worst monthly declines for select indexes include: down
28.2% for the S&P GSCI Index, down 21.5% for S&P 500, down 20.2% for MSCI
EAFE, down 17.4% for BXM, and a decline of only 8.6% for CLL Index.

20% BXM
20% CLL

S&P 500
10% CLL
MSCI EAFE

8%

S&P GSCI

7%
Russell 2000

6%

12%

14%

16%
18%
Standard Deviation

20%

22%

Exhibit C: The portfolio with an allocation of 20% BXM and 80% S&P 500 had a return
of 9.2% and standard deviation of 14.8%. For more analysis, please see our January
2012 paper on index option writing at www.cboe.com/benchmarks
Sources for all Exhibits on this page: Bloomberg, Ibbotson, ACG.

Asset Consulting Group

231 South Bemiston Avenue, 14th Floor Saint Louis, Missouri 63105 314 862 4848

FEBRUARY 2012

KEY TOOLS FOR HEDGING AND TAIL RISK MANAGEMENT

TAIL RISK AND OPTIONS-BASED INDEXES - VXTH AND CLL (April 2006 - January 2012)
Exhibit E: Histogram with Monthly Returns for VXTH and S&P
500 Indexes (April 2006 - January 2012)

Exhibit D: Growth of $1 for VXTH, CLL and S&P 500 Indexes

(April 2006 - January 2012)

40

$1.60
VXTH $1.46

S&P 500 $1.15

30
29

30
25

4
0

0 0

4 4

-12% - -8%

-24% - -20%

Jan-12

Mar-11

May-10

Jul-09

Sep-08

Nov-07

Jan-07

Mar-06

-16% - -12%

$0.00

0 0

-20% - -16%

$0.20

9 9
6

0 0

0 0

0 0
20% - 24%

14

16% - 20%

10

$0.40

19

12% - 16%

15

$0.60

The worst monthly declines

were down 15.1% for S&P 500
and down 10.7% for VXTH.

8% - 12%

20

$0.80

4% - 8%

CLL $0.96

0% - 4%

$1.00

S&P 500
VXTH

-4% - 0%

$1.20

35

-8% - -4%

$1.40

Exhibit D: The growth in the value of a dollar invested on March 31, 2006. The VXTH
has outperformed the S&P 500 since inception.

Exhibit E: Since April 2006 the VXTH had only 9 months with losses of 4% or below
versus 13 months for the S&P 500. Conversely, the VXTH participated in 42 of the 43
positive months indicating upside participation as well as cushioning declines.

Exhibit F: Metrics for Returns, Risk, and Risk-adjusted Returns

(April 2006 - January 2012)

Exhibit G: Changes for 5 Indexes in Months in Which S&P 500

had Big Moves (More than 8.8%) (April 2006 - January 2012)

April 2006 - January 2012

S&P 500
Ret urn
2. 37%
Standard Deviation
17.72%
Beta vs. Market
1.00
Sk ewnes s
-0. 63
Kurt os is
0. 96
Sharpe Ratio
0.12
Semi-Standard Deviation
13.5%
Sortino Ratio (MAR=Cash Eq.)
0.30
Jensen's Alpha vs. S&P 500
0.00%
Correlation to S&P 500
1.00

MSCI
EAFE
-0. 31%
21.41%
1.11
-0. 6
0. 97
0.01
16.1%
0.13
-2.15%
0.92

S&P
GSCI
-4. 51%
26.46%
0.83
-0. 74
1. 86
-0.1
20.3%
-0.05
-4.53%
0.55

CLL
-0. 73%
11.45%
0.60
-0. 29
-0. 6
-0.16
8.4%
-0.01
-3.12%
0.92

VXTH
6. 67%
14.50%
0.59
-0. 41
0. 29
0.4
10.8%
0.78
4.49%
0.72

Oct 2008
Feb 2009
Sep 2008
Sep 2010
Apr 2009
Oct 2011

S&P
500
-16.8%
-10.6%
-8.9%
8.9%
9.6%
10.9%

MSCI
EAFE
-20.2%
-10.3%
-14.5%
9.8%
12.8%
9.6%

S&P
GSCI
-28.2%
-6.1%
-12.4%
8.5%
-0.9%
9.7%

CLL
-3.8%
-5.4%
-6.8%
5.4%
5.6%
4.9%

VXTH
6.1%
-10.7%
-2.3%
8.1%
8.6%
9.1%

Exhibit F: The VXTH index had risk-adjusted performance that was superior to that of
the S&P 500 per metrics such as the Sortino Ratio, Sharpe Ratio and Jensens Alpha.
Please note that the above indices had negative skewness, and the measures of
risk-adjusted returns are imperfect when measuring non-normal distributions.

Exhibit G: The CLL and the VXTH provided a cushion during the worst three months
for the S&P 500 and MSCI EAFE since April, 2006. The trade-off is reduced upside
participation in the three best months.

Exhibit H: Over - Under Chart with Returns Relative to S&P

500 (April 2006 - January 2012)

Exhibit I: Return and Volatility (April 2006 - January 2012)

4%

20

20% VXTH

15

CLL
VXTH

In the 4th quarter, 2008, the

VXTH increased 0.16% versus a
decline of 22% for the S&P 500.

Annualized Return

10

3%

-5
-10
-15

-25

-20

-15

-10

-5

S&P 500

10

15

20

S&P 500

2%

20% CLL

10% CLL

Russell 2000

1%

0%
MSCI EAFE

CLL
VXTH

-20

10% VXTH

-1%
25

Exhibit H: The CLL cushion during declines is clear and compelling while the upside
participation is somewhat moderated based on the underlying option exposures.

14%

16%

18%
20%
Standard Deviation

22%

24%

Exhibit I: The portfolio with an allocation of 20% VXTH and 80% S&P 500 had a return
of 3.4% and standard deviation of 16.4%.
Sources for all Exhibits on this page: Bloomberg, Ibbotson, ACG.

Asset Consulting Group

231 South Bemiston Avenue, 14th Floor Saint Louis, Missouri 63105 314 862 4848

FEBRUARY 2012

KEY TOOLS FOR HEDGING AND TAIL RISK MANAGEMENT

DIVERSIFICATION AND VIX FUTURES INDEXES - VXMT, DyVX, AND VTRsk (April 2006 - January 2012)
Exhibit K: Correlations of Weekly Changes for Select Indexes
(April 7, 2006 - February 3, 2012)

Exhibit J: Growth of $1 for VXMT, DyVX, VTRsk and S&P 500

Indexes (March 31, 2006 January 31, 2012)
$6.00
$5.00

DyVX $4.78

$4.00
$3.00
VTRsk $2.49

$2.00

Mar-11

May-10

Jul-09

Sep-08

Nov-07

Jan-07

$0.00

Mar-06

$1.00

Jan-12

VXMT $1.53
S&P 500 $1.15

S&P 500
VIX (Spot)
VXMT
DyVX
VTRsk
CLL
VXTH
MSCI EAFE
S&P GSCI

S&P
500

VIX
MSCI S&P
(Spot) VXMT DyVX VTRsk CLL VXTH EAFE GSCI

1.00
-0.72
-0.70
-0.63
-0.60
0.89
0.87
0.84
0.46

1.00
0.73
0.53
0.56
-0.70
-0.49
-0.64
-0.30

1.00
0.83
0.64
-0.68
-0.53
-0.64
-0.37

1.00
0.82
-0.48
-0.39
-0.59
-0.36

1.00
-0.42
-0.33
-0.61
-0.41

1.00
0.83 1.00
0.77 0.69
0.41 0.36

1.00
0.55

1.00

Exhibit J: The three futures-based indices added value due to the fact that they all
rose more than 80% in 2008 (see also the annual returns table Exhibit A).

Exhibit K: The CLL and VXTH have a high correlation to the S&P 500 due to their
stock exposure. All of the futures-based indices are negatively correlated to the stock
indexes.

Exhibit L: Metrics for Returns, Risk, and Risk-adjusted Returns

(April 2006 January 2012)

Exhibit M: Changes for 5 Indexes in Months in Which S&P 500

had Big Moves (More Than 8.8%) (April 2006 January 2012)

S&P
500
Return
2.37%
Standard Deviation
17.72%
Beta vs. Market
1.00
Skewnes s
-0.63
Kurtos is
0.96
Sharpe Ratio
0.12
Semi-Standard Deviation
13.5%
Sortino Ratio (MAR=Cash Eq.)
0.30
Jensen's Alpha vs. S&P 500
0.00%
Correlation to S&P 500
1.00

Bonds
6.59%
3.45%
0.02
0.13
1.68
1.34
2.4%
1.24
4.68%
0.12

10%VXMT 10%DyVX 10%VTRsk

/90% S&P /90% S&P /90%S&P
4.05%
6.02%
5.97%
13.51%
14.06%
13.36%
0.75
0.77
0.67
-0.42
-0.26
-0.34
0.54
-0.09
0.14
0.23
0.36
0.37
10.1%
10.3%
9.8%
0.52
0.74
0.76
1.51%
3.41%
3.50%
0.98
0.97
0.88

Oct. 2008
Feb. 2009
Sep. 2008
Sep. 2010
Apr. 2009
Oct. 2011

BarC
Agg
-2.4%
-0.4%
-1.3%
0.1%
0.5%
0.1%

S&P 500
-16.8%
-10.6%
-8.9%
8.9%
9.6%
10.9%

VXMT
44.0%
6.6%
13.3%
-5.8%
-7.2%
-16.0%

DyVX
77.6%
3.2%
14.5%
1.7%
-2.5%
-12.0%

VTRsk
162.5%
-1.0%
12.1%
1.5%
-7.0%
-28.9%

Exhibit L: A 10% allocation to the futures-based indices had risk-adjusted performance

that was superior to that of the S&P 500 per metrics such as the Sortino Ratio, Sharpe
Ratio and Jensens Alpha. Please note that the measures of risk-adjusted returns are
imperfect when measuring non-normal distributions with negative skewness.

Exhibit M: The futures-based indices realized significant increases during September

and October 2008. Conversely, they experienced double-digit declines during
October 2011, a month when the S&P 500 rose 10.9%.

Exhibit N: Over Under Chart with Returns Relative to S&P

500 (April 2006 January 2012)

Exhibit O: Returns and Volatility (April 2006 January 2012)

7%

20
15

6%

10% DyVX/90% S&P 500

10% VTRsk/90% S&P 500

Annualized Return

In the 4th quarter of 2008, 10%

VTRsk 90% S&P 500 declined
3.3% versus a decline of 22%
for the S&P 500.

10

0
-5
-10

10% DyVX / 90% S&P 500

10% VTRsk / 90% S&P 500

-15

-20

-15

-10

-5

S&P 500

10

15

20

5%
4%
3%

10% DyVX

5% VTRsk
5% DyVX

10% VXMT
5% VXMT

S&P 500

2%

-20
-25

10% VTRsk

25

Exhibit N: Allocating 10% to the VTRsk and DyVX provided cushion during declines
while also participating in rising markets.

10%

13%
16%
Standard Deviation

19%

Exhibit O: The portfolio with an allocation of 10% VTRsk and 90% S&P 500 had a
return of 6.0% and standard deviation of 13.4%.
Sources for all Exhibits on this page: Bloomberg, Ibbotson, ACG.

Asset Consulting Group

231 South Bemiston Avenue, 14th Floor Saint Louis, Missouri 63105 314 862 4848

FEBRUARY 2012

KEY TOOLS FOR HEDGING AND TAIL RISK MANAGEMENT

PRICING OF VIX SPOT AND FUTURES
Exhibit P: Pricing of VIX Spot Index and VIX Futures

Exhibit Q: % Changes in October 2008

VTRsk

162.5%

DyVX

77.6%

VIX Index (spot)

52.0%

VIX Feb '09 Futures

47.9%

VXMT

44.0%

VXTH

6.1%

CLL

-3.8%

S&P 500

-16.8%
-20.2%

MSCI EAFE

-28.2%

S&P GSCI
-50%

Exhibit P: The VIX Spot Index is not an investable index. The VIX future returns will
differ over time depending upon market expectations. Note the difference in the VIX
Spot Index versus two futures expirations during the very volatile August to December,
2008 period. Contango occurs when the futures are trading higher than the spot
index. Backwardation occurs when the futures trade lower than the spot index.

CAPACITY

50%

100%

150%

200%

Exhibit Q: In October 2008 the VIX-based indexes rose, and the S&P 500 declined by
16.8%. The VIX-based indices can provide protective benefits during large drawdown
periods. Note the difference in returns for the VIX spot index and VIX February 2009
futures. The VIX spot index often has bigger moves than the VIX futures, which reflect
the future expected value of VIX.

Exhibit S: VIX Index and the PUT and Call Volume for SPX and
VIX Options (January 2007 - January 2012)

Daily Closing
Value

Exhibit R: Average Daily Volume for SPX Options, VIX Futures,

and VIX Options (2004 2011)

0%

VIX Index

90

80.86

60
30
0

3-Jan-2007

3-Jan-2008

2-Jan-2009

4-Jan-2010

3-Jan-2011

3-Jan-2012

Daily Volume -- 20-day Rolling Avg.

1,000,000
800,000

SPX Puts

600,000

SPX Calls

400,000

VIX Calls

200,000

VIX Puts

0
Jan-07

Exhibit R: Our rough estimates for average daily notional dollar value of trading in
2011 (with a delta-adjustment of 0.5 for options, and a beta adjustment of 3.0 for VIX
products) are more than $48 billion for SPX options, $3 billion for VIX futures, and $1
billion for VIX options. Assets in VIX-related exchange-traded products (ETPs) reached
$5 billion in February 2012.

Jan-08

Jan-09

Jan-10

Jan-11

Jan-12

Exhibit S: As noted in Exhibit A on the first page, the CLL Index buys SPX puts and
sells SPX calls, and the VXTH Index buys VIX calls. The index option volume often has
spiked when the VIX Index rose sharply. The put-call ratios during the time period
above were 1.68 for SPX options and 0.54 for VIX options.
Sources for all Exhibits on this page: Bloomberg, CBOE.

Asset Consulting Group is an investment consulting firm which provides a full scope of investment advisory services to a select group of clients. The Chicago Board Options
Exchange (CBOE) provided financial support for this paper. The CBOE S&P 500 indices are designed to represent proposed hypothetical strategies. The actual performance of
investment vehicles such as mutual funds can have significant differences from the performance of the hypothetical indices. Like many passive indices, the indices do not take into
account significant factors such as transaction costs and taxes. Investors attempting to replicate the indices should discuss with their advisors possible timing and liquidity issues.
Past performance does not guarantee future results. Standard & Poors, S&P, and S&P 500 are registered trademarks of Standard & Poors Financial Services LLC and are
licensed for use by the CBOE. CBOE and Chicago Board Options Exchange are registered trademarks of the CBOE, and the CBOE indices are servicemarks of the CBOE. CBOE
calculates and disseminates the indices. The methodology of the indices are owned by CBOE and may be covered by one or more patents or pending patent applications. The
information contained in this report is based on information obtained by ACG from sources that are believed to be reliable. Opinions and estimates offered constitute our judgment
and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. We believe the information provided here is
reliable, but do not warrant its accuracy or completeness. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The views and
strategies described may not be suitable for all investors. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied
on for accounting, legal or tax advice. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Any forecasts contained
herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation. The views expressed are those of Asset Consulting Group.
They are subject to change at any time. These views do not necessarily reflect the opinions of any other firm. Copyright 2012 Asset Consulting Group, LLC. All Rights Reserved.

Asset Consulting Group

231 South Bemiston Avenue, 14th Floor Saint Louis, Missouri 63105 314 862 4848