The portfolio lost 4.6% for the month of August, bringing the year-to-date return to 0.3%. Over that period, the S&P was down 5.7%. Most of our positions made losses in the month, particularly China-related equities and short treasuries. But one investment decision was a particular disaster.
As the VIX was hitting some relatively high levels, we decided to sell volatility to add a bit of yield. We sold a few puts at levels where we wouldn't mind buying the underlying equity. But as it wasn't possible to execute the size trade we preferred, we decided to try an ETF structure called XIV - an inverse short VIX futures structure. But though this reads like "inverse VIX", it doesn't track VIX at all, it tracks VIX futures, a different animal entirely. Worse still, volatility did not subside, and even worse, because the ETF must roll its short-term futures exposure in the face of an upward sloping volatility curve, it is short volatility AND SHORT CARRY! We lost our shirt, or 23% of our trade size, equivalent to 1% of the fund. We swore off this kind of ETF structure once before, and only wish we'd remembered our oath.
* We report the percentage gain or loss during a month in an additive sense for ease of comparison, however the year-to-date returns are reported as a chained series. As the total return become greater, and as inflows have an effect on the portfolio, the two will diverge. Adding up the monthly returns for the year may not give the precise total return.
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