Huygens Active U.S. Derivatives Portfolio

Did you predict that the second half of 2022 would be a good time to harvest volatility risk premium, after monetary tightening caused stock market volatility in the first half of the year?

Did you predict the first half of 2020 would be a bad time to harvest volatility risk premium, well before unprecedented COVID-related stock market volatility commenced?

Our Huygens U.S. Derivative Market Stress Indicator did.

Our active derivatives portfolios are designed to harvest Volatility Risk Premium (VRP, described in this AQR Report - Huygens has no affiliation with AQR). VRP is a well-known behavioral bias of stock market investors to overpay for insurance against investment losses.  We offer these portfolios because VRP harvesting can be a source of investment gains with low correlation to stock and bond returns, diversifying and enhancing your overall investment performance.

Harvesting VRP can be risky, so we only offer it to our clients who can tolerate the risk, as assessed by the rules embedded in our Portfolio Builder. Huygens’s U.S. Derivative Market Stress Indicator helps us manage this risk. It signals when to position your portfolio bearishly, aiming to protect against potential losses, and when to position bullishly to capture potential gains from VRP harvesting.

The above portfolio weights are for our customers that have selected aggressive growth as their investment objective. The precise weighting of these ETFs in your portfolio will depend on whether you have selected the moderate growth or aggressive growth objective.

If you would like to learn more concepts of harvesting VRP using VIX futures contracts and ETFs, below are links to early research papers on the topic. Keep in mind, Huygens is not affiliated with either firm and these references do not describe precise aspects of our strategy design.

• “VIX your portfolio - Selling volatility to improve performance,” June 2013, Blackrock Investment Insights

• “Easy volatility investing, April 2013, Double-Digit Numerics

Short VIX futures index return on Huygens signal bullish and bearish days

Since we began offering our Active U.S. Derivatives portfolios in 2020, our Derivative Market Stress signal has proven its ability to predict the likelihood of large losses when shorting VIX index futures. The chart below shows the difference in average returns* on days when our signal is bullish and when it is bearish.

Huygens Active U.S. Derivatives Portfolio monthly performance* since inception

January 2020 - December 2022

*Important notes:

1. Actual performance shown for these portfolios reflects client account and proprietary account performance, both of which reflect the pro-forma impact of 1.50% management fee

2. Huygens benchmarks our Active U.S. Derivatives Portfolios against the S&P VIX short-term futures inverse index. This index reflects the daily returns of a short position in the 1-mo and 2-mo weighted to result in a constant maturity of 30 days. You can learn more about this index and review its historical performance at the S&P Dow Jones Indices website

3. The Huygens Active U.S. Derivatives Portfolio’s bull market positioning composition has changed twice since introduction in 2020. All of these compositions have been designed to give comparable levels of short VIX futures exposure through exchange traded funds

   • From January 2020 to June 2020, The VelocityShares Daily Inverse VIX Medium-Term ETN (Ticker: ZIV) was used. The ETN was terminated by its sponsor in June of 2020. It tracked the inverse daily returns, before fees and expenses, of the S&P 500 VIX Mid-Term Futures Index, which reflects the returns of a rolling long position in the fourth, fifth, sixth, and seventh month VIX futures contracts, maintaining a constant weighted maturity of 5 months.

   • From July 2020 to July 2022, The ProShares Short VIX Short-Term Futures ETF (Ticker: SVXY) was used. The ETF seeks daily investment results, before fees and expenses, that correspond to one-half the inverse (-0.5x) of the daily performance of the S&P 500 VIX Short-Term Futures Index.

   • From August 2022 to the present, the Volatility Shares -1x Short VIX Futures ETF (Ticker: SVIX) is used. The ETF seeks to provide daily investment results, before fees and expenses, that correspond generally to the Short VIX Futures Index. Huygens selected this instrument over the SVXY ETF due to its superior end-of-day rebalancing algorithm, which is designed to reduce end-of-day price fluctuation in the event of a large intra-day increase in the value of the index. We urge you to read the full ETF prospectus at VelocityShares.com before investing in this strategy..

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Risks

The Huygens Active U.S. Derivatives Portfolio is a highly risky and speculative investment strategy. Risks include the potential loss of the entirety of any investment in the derivative Exchange Traded Fund (ETF) portion of the portfolio. The ETF that the portfolio employs to gain the desired exposure presents risks common to ETFs (including the risk that the it will not correlate with the index it seeks to track, which can occur for a number of reasons), and risks inherent in the volatility of the instruments in which the ETF invests. A single-day or intraday increase in the level of the ETF’s benchmark approaching 100% could result in the total loss or almost total loss of an investor’s investment in that ETF, even if such benchmark subsequently moves lower. We urge you to read the SVIX prospectus before investing in this strategy.