Harvard Shorted VIX, Should You?

Learning how to emulate endowments and other sophisticated investment funds.

For Many years I have studied how college endowments manage their portfolios in terms of how they blend assets together, how their thoughts on asset allocation evolve, how they manage risk, how they manage correlation and anything else that might come along.

The point is not to copy what they do, that's not practical for several reasons but there is plenty to learn, then figure what things they do can be applied to retail sized accounts and then how to actually apply what they do. One example of this from quite a few years ago has to do with Harvard owning timberland. It had a low correlation to equities, lower volatility and steady returns. Buying real estate the Northwest in client accounts obviously wasn't practical but Plum Creek Timber came pretty close to offering the traits that Harvard was seeking and that trade worked as a diversifier for quite a few years. Its correlation to the market started to go up, maybe as a function of what I am describing becoming more popular or maybe something else but it evolved into something different, more of an equity proxy so I sold it. Again, this was all many years ago.

I found a couple of current things related to endowments that I thought were interesting. The first is that apparently Harvard owns shares of ProShares Short VIX Futures ETF (SVXY), it is making a bet that volatility will remain low. Note that this was from 13-f filings disclosed with a lag so they could be out of the position now. Shorting volatility has been a wildly profitable trade, over the last year SVXY is up 164%. It has benefited from lower volatility and also from contango, contango is one of the reasons the long VIX products are all down 98 or 99%.

Every now and then the VIX Index rises very sharply and very quickly and funds like SVXY can cough up 20% like it was nothing. The trend for the lifetime of SVXY, if not longer than that, has been to shrug off those spikes and resume the same trend. Obviously this can continue but there is no way to know how much longer it can continue and one thing is certain it isn't early for this trade. The other day we blogged about trades with more risk than reward and this might be one of them.

Harvard is obviously a very sophisticated pool of capital and I don't doubt their ability to adroitly manage the trade but this is the sort of thing that probably isn't the right trade for the typical RIA or individual investor.

On a sort of related note, Institutional Investor asked When Will Yale Buy Bitcoin. The article was more about cryptocurrencies needing a first mover in the Institutional realm to then get more widespread adoption. There was one joke in there that the University of Chicago will add Bitcoin about six months after Yale does.

The article notes that endowments need to evolve and they have as evidenced by the adoption of ETFs, Harvard's willingness to dabble in VIX and it makes sense that at some point cryptocurrencies could play a role in asset allocations or would be owned by one of the hedge funds Harvard (or any of the others) use.

Should you follow that lead into cryptos? There can be no answer that suits everyone but there are a couple of key takeaways on how to proceed. I've talked many times in the last few weeks about any position sizing being small. This way if Bitcoin goes to $1 million you stand to benefit tremendously, if it goes to zero you'd not be doomed. Recognize the extent to which greed and FOMO are definitely driving the decisions for some folks and you need to be able to understand if greed and FOMO are driving your decisions. I saw an ad about buying Bitcoin in an IRA. Don't open an IRA account at some firm that just hung it's shingle ten minutes ago and send them your money. That seems like tragedy waiting to happen. There will be exchange traded products that can be bought and sold in brokerage accounts soon enough.

To the extent endowments and similar pools haven't jumped in maybe tells you that there is time and that you too can be patient for the right vehicle, if owning it at all is something you think you should do.

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