Short-Volatility Asset Class: An Attractive Addition to Investor Portfolios

What’s all the hype about short volatility? Short‐volatility strategies seek to enhance portfolios’ risk-adjusted return potential. Consider that:

  • Short volatility, as measured by the SPVXSPIT Index, has delivered four times the average returns of the S&P 500 Index over the last ten years ending December 2017.
  • Inverse volatility strategies are capable of generating positive returns in a variety of market conditions.
  • With its positive correlation to equities, short volatility may even be an appropriate substitute for traditional equity exposure.
  • But investing in short volatility comes with risk of substantial losses.

Short volatility can be compared to selling protection on an equity portfolio. Investors who are short volatility are compensated for tolerating risk over time, in exchange for suffering occasional losses.

The other side of the trade, long volatility, can be likened to buying that protection on an equity portfolio. While it provides a hedge against equity exposure, long volatility has underperformed short volatility over the long term. This is because investors have tended to overestimate the duration and magnitude of volatility.

Since volatility typically remains low during bull markets, and may last for longer periods than bear markets, the short‐volatility side of the trade has shown to be a better position than long volatility.

Traditional products offering exposure to short volatility come with the risk of substantial losses because they are index‐based. When volatility spikes, it’s not uncommon for short‐volatility investments to lose 20% or more of their value in just a few trading days. Yet, spikes in volatility have been typically followed by mean reversion, including during some of the most volatile periods in history—the Great Depression of the 1930s, the financial crisis and resulting market crash of 2008‐2009 and Brexit (i.e., the United Kingdom’s decision to leave the European Union) in 2017.

Traditional products offering exposure to short volatility, such as Exchange Traded Products (ETPs) or futures are designed to be short‐term, tactical trades and not to be held over the long term. This is because the risk exists of a large spike in volatility that could not wipe out any prior gains, but also wipe out the investment itself.

While ETPs investing in short volatility are drawing record inflows and attracting a great deal of media attention, these strategies are not meant for long‐term exposure, but are rather designed as short‐term tactical investment vehicles.

Measured Risk Strategy Fund, launched in December 2016, is an actively managed, tactical short volatility mutual fund designed for long‐term buy‐and‐hold exposure.

Investors should carefully consider the investment objective, risks, charges and expenses of the Measured Risk Strategy Fund. Mutual funds involve risk, including possible loss of principal. There is no guarantee the Fund will meet its objective. This and other information is contained in the prospectus and should be read carefully before investing. For a prospectus please call Measured Risk Portfolios at (855) 907‐3407 or at HYPERLINK The Funds are distributed by Northern Lights Distributors, LLC, member FINRA / SIPC. Northern Lights Distributors, LLC is not affiliated with Measured Risk Portfolios, Inc.

The Fund employs various strategies to achieve the objective of capital appreciation and income. The primary tool to achieve this objective is the use of derivatives, primarily options. Options involve risk and are not suitable for all investors. The use of options and the resulting high portfolio turnover may expose the Fund to additional risks that it would not be subject to if it invested directly in the securities underlying those options. The Fund may experience losses that exceed those experienced by funds that do not use derivatives, options and hedging strategies. Purchased put or call options may expire worthless and may not deliver the expected return due to time value decay. Written call and put options may limit the Fund’s participation in gains and may amplify losses in market declines. The Fund’s losses are potentially large in a written put or call transaction. If unhedged, written calls expose the Fund to potentially unlimited losses.

The Fund is nondiversified and as a result, changes in the value of a single security may have a significant effect on the Fund’s value. Other risks include U.S. Government securities risks and investments in fixed income securities. Typically, a rise in interest rates can cause a decline in the value of fixed income securities or derivatives owned by the Fund. Volatility Exchange Traded Products (ETPs) may have significantly greater daily movements that that of the broad US equity markets. Investors cannot directly invest in an index and unmanaged index returns do not reflect any fees, expenses or sales charges. ETPs are subject to investment advisory and other expenses, which will be indirectly paid by the Fund. As a result, the cost of investing in the Fund will be higher than the cost of investing directly in ETFs and may be higher than other mutual funds that invest directly in stocks. ETFs are subject to specific risks, depending on the nature of the Fund. The Fund may buy or sell options on volatility related ETPs, such as: (referenced positions are subject to change and should not be considered investment advice)