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Abstract
Warren evaluates investing in volatility products under a range of investor objectives, including risk and return at the total portfolio level, benchmark-relative performance, and liability-aware investing. He shows that the potential role for volatility exposure depends on investor circumstances. Long positions in forward variance swaps or longer-dated VIX futures can be effective for hedging equity-related risk within balanced portfolios, but do so at the cost of exacerbating benchmark-relative risk and may be of limited benefit in certain liability-aware situations. Investors best placed to capture the volatility risk premium through shorting volatility include those with higher tolerance for total portfolio and benchmark-relative risk, longer investment horizons, or interest rate–sensitive liabilities.
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