We are not big fans of using VIX for timing equities. Strategies that seem to work on US market data fall apart when applied to Indian equity indices. When Alpha Architect published their follow-on VIX and Trend Following results, we decided to test it on our own NIFTY large-, mid- and small-cap indices.
India VIX decides how much recent history to use:
- When volatility is calm, rank the assets by their 10-month performance. This changes slowly and avoids reacting to short-term noise.
- When volatility is elevated, use 3-month performance so the strategy can respond faster.
- When volatility is very high, use only the latest month’s performance.
tl;dr: it kind of works – beats the NIFTY 50 after 25bps of costs post-COVID.
However, with an on-going 30% drawdown, it is not exactly self-recommending. Having said that, its pre-COVID results might be a better indicator of how the strategy manages to side-step large shocks.
It does a semi-decent job of switching between different market-cap indices.
The full-period metrics (2009 – 2026) are promising. Seems to hold its own against buy & hold – lower drawdowns with similar(ish) returns.
While 25bps of costs should cover transaction costs, the problem is surviving capital gains taxes require a much higher returns.
Details of the approach, descriptions of the strategies and code are on github.