Positioning for more volatility

Author: Amin Khakiani, Focal Point Management

Models: Quantitative Hedging and Quantitative Broad Index

Disclosures:  XIV, UVXY

May saw downward price action in the broad financial markets and a marked uptick in volatility.

Our volatility-based portfolio was positioned to benefit from a more tranquil period of volatility, and our position in the VelocityShares Daily Inverse VIX , (XIV) an ETF which generally goes up when volatility declines, lost ground.

However, as the month drew to a close, our mean-reversion and trend-based models indicated to us that a switch to bullish volatility products would be beneficial.

A position in the ProShares UltraVIX Short-term Futures, (UVXY), an ETF which generally goes up when volatility increases, was opened and contributed to monthly performance results.

Overall, 2012 has been a period marked by low volatility. But things have changed in springtime, particularly in May. A focus on the European debt situation and concerns over weaker U.S. economic data points have caused volatility to spike.

Our model portfolios should benefit with the return of volatility and we are positioning the portfolio for more active trading to gain from this development.

Covestor Ltd. is a registered investment advisor. Covestor licenses investment strategies from its Model Managers to establish investment models. The commentary here is provided as general and impersonal information and should not be construed as recommendations or advice. Information from Model Managers and third-party sources deemed to be reliable but not guaranteed. Past performance is no guarantee of future results. Transaction histories for Covestor models available upon request. Additional important disclosures available at http://site.covestor.com/help/disclosures. For information about Covestor and its services, go to http://covestor.com or contact Covestor Client Services at (866) 825-3005, x703.

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