Strategy altered by VIX value

[Nelson Brady]

Have you guys ever backtested a portfolio e.g. MYRS where you completely exit when the vix is over some number and do not re-enter until under some number? Probably need a little hysteresis so just to pick two numbers (no idea if the right choice) say out if vix over 30 and back in when under 28. Might need every two week adjustment to work best.

[Frank1 Grossmann]

We did not backtest the strategies using VIX as a trigger for investment, but if you have Quanttrader you will see that there is a variable called „volatility limiter“ which scales back the investment so that the portfolio volatility does not exceed a given value. For example if portfolio volatility is 40 and you limit to 10, then you would go 75% into cash. The problem is that this is something which is normally only used when you rebalance the portfolio. You can however also see the daily actual allocation which will be reduced using this factor on a daily basis.
Timing however is very difficult in a crisis like we have it at the moment as the brake down of hedge correlations was very abrupt.
I will however try to include VIX in Quanttrader to backtest if it can be used as a emergency exit.

[StefanM]

Thanks, Frank; I have also been wondering if VIX above or below a certain level would act as a further refinement to the QT systems.

Having said that, it would probably mean exiting a strategy on a non-rebalance day. If such an approach reduced drawdown, then it might have merit.

A further refinement to consider would be exiting certain individual positions within a strategy that are in danger of becoming losing positions and retaining profitable positions until the month end/rebalance date. That would make the strategies more ‘active’ which may or may not suit some or most subscribers.

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