THE CHALLENGE OF VOLATILITY
Volatility remains one of the most misunderstood and challenging concepts in the financial world. In our original New Vol eBook, we redefined volatility as more than a market downturn—it’s a systemic shock capable of disrupting lives. We also presented an alternative approach: shifting volatility hedges outside traditional portfolios and investing in non-financial hedges and tangible investments (personal resilience). Recent market data from 2024 reinforces our argument.
VOLATILITY IN 2024: BY THE NUMBERS
Consider the 2024 annual returns of key volatility instruments:
- VIX (CBOE Volatility Index): +28.0% — The most well-known volatility gauge rose sharply, reflecting heightened market uncertainty.
- VXX (iPath S&P 500 VIX Short-Term Futures ETN): -26.22% — Despite VIX’s rise, this widely traded product saw steep losses due to inefficiencies in the VIX futures curve and the cost to roll futures.
- SVOL (Simplify Volatility Premium ETF): -7.55% — Designed to profit from selling volatility, its performance suffered as volatility trends increased.
- Mutiny Funds Cockroach Portfolio: Flat — This diversified strategy aimed at hedging chaos delivered stability but no upside.
These returns highlight an essential point: volatility as an asset class is inherently unpredictable. Products marketed as hedges frequently fail to deliver consistent protection when markets demand it most.
THE COMPLEXITY OF TRADING VOLATILITY
Volatility hedges within a portfolio introduce significant complexity. Here’s why they’re notoriously hard to trade, monitor, and monetize:
- Structural Inefficiencies:
Instruments like VXX and VIX futures suffer, as the cost of rolling contracts erodes returns. Even in years when volatility spikes, these products may underperform because of their design.
- Position Sizing:
Determining how much volatility exposure is needed to hedge effectively is far from straightforward. Too little offers no real protection; too much creates unnecessary drag on performance.
- Timing Risks:
Volatility is naturally mean-reverting. Spikes are often short-lived, making it difficult to enter and exit positions profitably.
- Liquidity Concerns:
During periods of extreme market stress, the cost of hedging rises as volatility instruments become more expensive and less liquid.
- Uncertain Outcomes:
As seen in 2024, volatility hedges deliver inconsistent results. This inconsistency calls into question their reliability as portfolio anchors.
OUR DISCLAIMER
We understand that each of these volatility indices comes with nuance. The sponsors of each can make their case, as any sponsor would, but we are simplifying to help a broader audience make more informed decisions.
THE CASE FOR PERSONAL RESILIENCE
Given these challenges, we argue that volatility hedges are better deployed outside the portfolio. Instead of chasing financial instruments with unpredictable outcomes, consider the tangible and measurable benefits of investing in personal resilience. This approach aligns with our expanded definition of volatility—a hedge against systemic shocks, such as market freezes or currency crises, rather than mere market downturns.
Here’s what personal resilience looks like in practice:
- Food Security: build deep pantries or explore local food production for your household.
- Energy Independence: invest in solar panels, generators, or other solutions to weather disruptions.
- Water Preparedness: ensure access to clean water through storage solutions or well installations.
These non-financial investments act as real-world hedges, offering peace of mind and long-term practical value regardless of market conditions. Unlike traditional volatility instruments, their returns aren’t subject to structural inefficiencies, liquidity crises, or market timing errors.
WHERE VOLATILITY MEETS RESILIENCE
In New Vol, we introduced the idea of redefining volatility as a systemic challenge. By reframing the problem, we arrived at better solutions. Volatility hedges within a portfolio often complicate rather than simplify risk management. By reallocating resources toward resilience-focused strategies, families can protect their quality of life and their wealth in an ever-changing world.
The returns of volatility instruments in 2024 confirm what we’ve long suspected: the unavoidable inconsistency and complexity of trading volatility make it a poor fit for portfolios. Instead, the true hedge lies outside the financial realm, in investments that build lasting resilience and stability in the face of systemic shocks.
The journey continues, but one thing is clear: real solutions are found where the financial meets the practical. Building resilience isn’t just a hedge—it’s peace of mind for the future.
Build it. Live it. Protect it.
