Paul Baiocchi, Moderator
ETF Analyst, IndexUniverse
Volatility: Christopher Cole, CFA, Panelist
Managing Partner & Founder
Artemis Capital Management LLC
Friend or Foe?
Thomas M. Chapin, CFA, Panelist
Chief Investment Officer
Mill Creek Capital Advisors LLC
Volatility: Paul Baiocchi
Moderator
ETF Analyst
Friend or Foe? IndexUniverse
Christopher Cole, Thomas M. Chapin,
CFA CFA
Panelist Panelist
Managing Partner & Founder Chief Investment Officer
Artemis Capital Mill Creek Capital
Management LLC Advisors LLC
VOLATILITY: FRIEND OR FOE?
INSIDE ETFS TRADING CONFERENCE / NEW YORK STOCK EXCHANGE- DECEMBER 11, 2012
For Investment Professional Use. Not for Distribution
Christopher Cole, CFA
Artemis Capital Management LLC
Artemis Vega Fund LP
520 Broadway, Suite 350
Santa Monica, CA 90401
(310) 496-4526 phone
(310) 496-4527 fax
info@[Link]
Abnormally Steep VIX Futures Term Structure
VOLATILITY: FRIEND OR FOE?
BULL MARKET IN FEAR
"There is no terror in the bang, only in the anticipation of it." Alfred Hitchcock
Bull Market in Fear / VIX Futures Curve (normalized by spot VIX)
1.90x
2004 to Present
1.70x
Vix Futures/Spot Vix
1.50x
1.30x
1.10x
0.90x
0.70x
0.50x
Mar-04
Jun-04
Sep-04
Nov-04
Feb-05
May-05
Aug-05
Oct-05
Jan-06
Apr-06
Jun-06
Sep-06
Dec-06
Mar-07
May-07
Aug-07
Nov-07
Feb-08
Apr-08
Jul-08
Oct-08
Dec-08
Mar-09
Jun-09
Sep-09
Nov-09
Feb-10
May-10
Jul-10
Oct-10
Jan-11
Apr-11
Jun-11
Sep-11
Dec-11
M6
Feb-12
M3
Jul-12
VIX
Expiry
1
TEMPORAL PARADOX - Abnormally Steep VIX Futures Term Structure
VOLATILITY: FRIEND OR FOE?
Low VIX index does not mean cheap volatility
35 Low Volatility? Really?
VIX Futures Curve Comparison
August 2012 vs. September 2008
30 !
Forward VIX index (%)
25
20
August 17, 2012 / Lowest VIX in 5 years
15
September 15, 2008 / Day after Lehman Bros. Bankruptcy
10
Spot Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Month 7 Month 8
2
Sorcerer's Apprentice and TVIX
VOLATILITY: FRIEND OR FOE?
DON’T BE A FOOL
TVIX became the market for short-term VIX futures in Q1 2012
Leveraged ETPs introduce self-reflexivity whereby the issuer's vol exposure is
amplified in the direction of spot vol movement
VIX index & TVIX TVIX Vega Exposure spot Vol Move
Feb 2012 to Mar 2012 $30
$20
21
Change in Vega Exposure ($mm)
$10
19
$0
17 -$10
15 -$20
-$30
13 TVIX ETN
VIX -$40
11
-$50
CS reissues
9 -$60
TVIX shares
3/22 -$70
7
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
70%
5
2/1 2/15 2/29 3/14 3/28 % Move in Vol (rebalanced 1+2 month VIX Futures)
On February 21 Credit Suisse suspended issuance of the Velocity Shares 2x Short-Term VIX ETN due to
"internal limits on the size of the ETNs“
Unbeknownst many retail investors continued to buy TVIX bidding it up to an 89% premium to NAV
TVIX's price collapsed by 50% in just two days after reissuance
Moral of Story: Vol ETPs do not simplify the process of volatility trading any more than CDOs enhance the
credit quality of their components
3
Volatility Microstructure Changes due to VIX ETNs
VOLATILITY: FRIEND OR FOE?
Volatility-of-VIX futures in the last 15 minutes is substantially higher than that of
the VIX index itself demonstrating the power of VIX ETNs
Volatility of VIX Index vs 1m Vix Future (2012) by Trading Minute
Averages by Year (annualized)
Volatility of VIX by Minute (% annualized)
100
90
80
70
60
50
40
30
20
9:31 AM
9:47 AM
10:03 AM
10:19 AM
10:35 AM
10:51 AM
11:07 AM
11:23 AM
11:39 AM
11:55 AM
12:11 PM
12:27 PM
12:43 PM
12:59 PM
1:15 PM
1:31 PM
1:47 PM
2:03 PM
2008 (Vix)
2:19 PM
2009 (Vix)
2:35 PM
2:51 PM
2010 (Vix)
3:07 PM
2011 (Vix)
3:23 PM
2012 (Vix)
3:39 PM
3:55 PM
2012 (VIX Fut)
4:11 PM
2012 (VIX Fut) 2012 (Vix) 2011 (Vix) 2010 (Vix) 2009 (Vix) 2008 (Vix)
4
Source: Calculations executed by Artemis Capital Management LLC with data from CQG data factory. Average executed trades by minute.
Shadow Delta of VIX Derivatives
VOLATILITY: FRIEND OR FOE?
How do popular VIX ETPs perform in relation to traditional Volatility Trades?
NOT VERY WELL!
VIX ETPs vs. Traditional SPX Volatility Trades
Dec 2010 to July 2012
2.1
1.9
1.7
Growth of $1
1.5
1.3
1.1
0.9
0.7
0.5
0.3
May-11
May-12
Dec-10
Dec-11
Oct-11
Mar-11
Mar-12
Jan-11
Jul-11
Aug-11
Jan-12
Jul-12
Apr-11
Apr-12
Feb-11
Feb-12
Sep-11
Jun-11
Nov-11
Jun-12
Traditional Volatility Trading Volatility ETNs
ATM Long ATM Short
10% OTM Put VXX VXZ XIV XVIX
Straddle Straddle
Vol Bias Long Vol Short Vol Long Vol Long Vol Long Vol Short Vol Short Vol
Annualized Return -28.62% 31.31% -15.36% -52.35% -26.98% 12.13% -3.61%
Sortino Ratio -1.77x 0.79x -0.61x -1.94x -1.53x 0.18x -0.45x
Sharpe Ratio -1.20x 0.85x -0.45x -1.05x -0.87x 0.16x -0.30x
Return to Drawdown -0.57x 1.10x -0.36x -0.65x -0.58x 0.15x -0.20x
Max Drawdown -50.16% -28.39% -42.87% -80.38% -46.50% -79.53% -18.06%
5
Christopher
Contact Information
Cole, CFA – General Partner and Founder
Artemis Capital Management – Contact Information
VOLATILITY: FRIEND OR FOE?
Artemis Vega Fund L.P.
Artemis Capital Management, L.L.C.
520 Broadway, Suite 350
Santa Monica, CA 90401
info@[Link]
[Link]
Christopher Cole, CFA
Managing Partner & Portfolio Manager
(310) 496-4526 phone
(310) 496-4527 fax
[Link]@[Link]
Key Information/ Biography
Christopher Cole, CFA
Managing Partner & Portfolio Manager / Artemis Capital Management LLC
Christopher R. Cole, CFA is the founder of Artemis Capital Management LLC and the portfolio manager of the
Artemis Vega Fund LP. Mr. Cole’s core focus is systematic, quantitative, and behavioral based trading of
exchange-traded volatility futures and options. His decision to form a fund came after achieving significant
proprietary returns during the 2008 financial crash trading volatility futures. His research letters and
volatility commentaries have been widely quoted including by publications such as the Financial Times,
Bloomberg, International Financing Review, CFA Magazine, and Forbes. He previously worked in capital
markets and investment banking at Merrill Lynch. During his career in investment banking and pension
consulting he structured over $10 billion in derivatives and debt transactions for many high profile issuers.
Mr. Cole holds the Chartered Financial Analyst designation, is an associate member of the NFA, and
graduated Magna Cum Laude from the University of Southern California.
6
Legal Disclaimer
LEGAL DISCLAIMER
THIS IS NOT AN OFFERING OR THE SOLICITATION OF AN OFFER TO PURCHASE AN INTEREST IN ARTEMIS VEGA FUND,
L.P. (THE “FUND”). ANY SUCH OFFER OR SOLICITATION WILL ONLY BE MADE TO QUALIFIED INVESTORS BY MEANS
OF A CONFIDENTIAL PRIVATE PLACEMENT MEMORANDUM (THE “MEMORANDUM”) AND ONLY IN THOSE
JURISDICTIONS WHERE PERMITTED BY LAW. AN INVESTMENT SHOULD ONLY BE MADE AFTER CAREFUL REVIEW OF
THE FUND’S MEMORANDUM. THE INFORMATION HEREIN IS QUALIFIED IN ITS ENTIRETY BY THE INFORMATION IN
THE MEMORANDUM.
AN INVESTMENT IN THE FUND IS SPECULATIVE AND INVOLVES A HIGH DEGREE OF RISK. OPPORTUNITIES FOR
WITHDRAWAL, REDEMPTION AND TRANSFERABILITY OF INTERESTS ARE RESTRICTED, SO INVESTORS MAY NOT HAVE
ACCESS TO CAPITAL WHEN IT IS NEEDED. THERE IS NO SECONDARY MARKET FOR THE INTERESTS AND NONE IS
EXPECTED TO DEVELOP. NO ASSURANCE CAN BE GIVEN THAT THE INVESTMENT OBJECTIVE WILL BE ACHIEVED OR
THAT AN INVESTOR WILL RECEIVE A RETURN OF ALL OR ANY PORTION OF HIS OR HER INVESTMENT IN THE FUND.
INVESTMENT RESULTS MAY VARY SUBSTANTIALLY OVER ANY GIVEN TIME PERIOD.
CERTAIN DATA CONTAINED HEREIN IS BASED ON INFORMATION OBTAINED FROM SOURCES BELIEVED TO BE
ACCURATE, BUT WE CANNOT GUARANTEE THE ACCURACY OF SUCH INFORMATION.
7
The User Perspective
Context: Mill Creek Capital Advisors
Philadelphia-area investment advisory firm (“outsourced
CIO” business model)
Work with HNW families, endowments/foundations, and
defined benefit plans
Allocate assets across spectrum of global capital markets
Manager of managers
Execution: Separate Accounts, Mutual Funds, ETFs
Hedging Against (Equity Portfolio) Volatility
Hired by clients to take “appropriate risks” with their portfolios
Long-Term Hedges
Own assets with positive return characteristics which are not as volatile
as (or which are non-correlated or have low correlation to) global
equities
Short-Term Hedges
Go to Cash?
Options + Futures?
Structured Notes?
Buy Gold?
Buy Volatility?
Why Buying Volatility Look(ed) Interesting
90% $85.0
$80.0
80% $75.0
$70.0
70%
$65.0
$60.0
60%
$55.0
S&P Price Volatility $50.0
50%
$45.0
VIX Price (RHS)
$40.0
40%
$35.0
$30.0
30%
$25.0
10-year average
$20.0
20%
$15.0
10% $10.0
$5.0
0% $-
What About Selectively Owning “Dynamic Volatility”?
Back-tested Example: Equity Portfolio Impact of 5% position bought when VIX < $22, sold when VIX >$35
Own Vol (1=Yes) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2006 1 1 1 1 1 1 1 1 1 1 1 1
2007 1 1 1 1 1 1 1 1 1 1 1 1
2008 1 1 1 1 1 1 1 1 1 - - -
2009 - - - - - - - - - - - -
2010 - - 1 1 1 1 - - - - - 1
2011 1 1 1 1 1 1 1 1 - - - -
S&P 500 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Year
2006 2.65% 0.27% 1.24% 1.34% -2.88% 0.14% 0.62% 2.38% 2.58% 3.26% 1.90% 1.40% 15.79%
2007 1.51% -1.96% 1.12% 4.43% 3.49% -1.66% -3.10% 1.50% 3.74% 1.59% -4.18% -0.69% 5.49%
2008 -6.00% -3.25% -0.43% 4.87% 1.30% -8.43% -0.84% 1.45% -8.91% -16.80% -7.18% 1.06% -37.00%
2009 -8.43% -10.65% 8.76% 9.57% 5.59% 0.20% 7.56% 3.61% 3.73% -1.86% 6.00% 1.93% 26.46%
2010 -3.60% 3.10% 6.03% 1.58% -7.99% -5.23% 7.01% -4.51% 8.92% 3.81% 0.01% 6.68% 15.06%
2011 2.37% 3.43% 0.04% 2.96% -1.13% -1.67% -2.03% -5.43% -7.03% 10.93% -0.22% 1.02% 2.11%
VXZ-linked Index Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Year
2006 -0.76% -1.62% -5.02% 0.40% 11.92% -2.71% -2.33% 3.61% 3.68% -2.53% -2.31% 2.36% 3.66%
2007 -2.42% -5.12% -3.57% 1.01% 3.46% 4.17% 19.19% 6.35% -7.19% 5.88% 11.62% 1.52% 37.18%
2008 -0.19% 2.10% -1.58% -4.79% 4.29% -0.40% -4.96% 2.50% 14.48% 77.60% 13.03% 4.61% 132.29%
2009 0.12% 3.23% 1.22% -2.55% -8.18% -0.25% 3.81% 2.61% -0.34% 0.87% 2.68% -1.88% 0.74%
2010 -1.73% -1.49% 3.03% 4.41% 10.81% 2.72% -3.02% 7.39% 1.66% -2.17% 0.06% -1.78% 20.66%
2011 -5.75% -3.90% -4.86% 2.16% -2.25% -1.22% -6.01% 38.77% 9.55% -11.97% 3.63% -1.79% 8.82%
Relative Perform. Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Year
2006 -0.17% -0.09% -0.31% -0.05% 0.74% -0.14% -0.15% 0.06% 0.06% -0.29% -0.21% 0.05% -0.51%
2007 -0.20% -0.16% -0.23% -0.17% 0.00% 0.29% 1.11% 0.24% -0.55% 0.21% 0.79% 0.11% 1.45%
2008 0.29% 0.27% -0.06% -0.48% 0.15% 0.40% -0.21% 0.05% 1.17% 0.00% 0.00% 0.00% 1.59%
2009 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
2010 0.00% 0.00% -0.15% 0.14% 0.94% 0.40% 0.00% 0.00% 0.00% 0.00% 0.00% -0.42% 0.90%
2011 -0.41% -0.37% -0.25% -0.04% -0.06% 0.02% -0.20% 2.21% 0.00% 0.00% 0.00% 0.00% 0.90%
Ratio, 4-7 Mo VIX Contracts to VIX Front Month Contract
0.70
0.80
0.90
1.00
1.10
1.20
1.30
1.50
1.60
1.70
1.40
$10.00
$12.50
$15.00
$17.50
$20.00
$22.50
$25.00
$27.50
$30.00
But…it’s never that simple!
VIX Spot Price
$32.50
$35.00
$37.50
$40.00
$42.50
Slope of the VIX Futures Curve: Steeper at Low Levels of VIX Index
$45.00
$47.50
$50.00
Thank You.
Questions?