Thus, using a short (or “inverse”) exposure VXX as a “hedge” against the QQQ has one of two effects on a QQQ investment in a bullish outlook:

• When certainty firms up, the VXX falls while the tech-heavy market rises. Thus, the hedge is a boost.

• When certainty falters, the VXX rises and the hedge pares off some gains made in the tech-heavy market.

On the other hand, when certainty firms up during a bearish environment, the VXX falls while the tech-heavy market falls. In this case, the hedge pares some of the losses in the market.

Of course, it’s possible that there will be high uncertainty and bearish pressure on the tech-heavy market. This would be a two-headed cost to the strategy’s performance.

Hence, it’s not a perfect 1:1 hedge and active management is needed. This is now easily accessible to sophisticated investors by virtue of the recently launched “LS Short Volatility Long Tech ETP” (LSE: SVLT; ISIN: XS2595675641). This ETP (or “Exchange-Traded Product”) pairs QQQ with VXX via a proprietary methodology wherein the portfolio is rebalanced on a quarterly basis such that the short exposure to volatility will generally be in the 15% range relative to a long exposure to QQQ of 100%. The portfolio manager maintains discretionary powers to modify the short exposure in response to changing market outlook.

In the backtested period going back one year relative to the 23rdf of June this year, SVLT has delivered a return of over 46% while the S&P 500 and Nasdaq-100 have been a little over 17% and 12% respectively.

Upon a decline in conviction in the broad market, two effects can be assumed will take place:

1. There will be a “crowding” effect into tech stocks since they’re being deemed more survivable than most of the other “non-tech” companies. This will likely push up tech valuations while market volatility continues to plummet. This will not be a sustained movement; eventually tech stocks will have to follow the rest of the market.

2. There will be an “inflection point” when the drop in stock valuation will no longer be countered by the rise in the hedged position in volatility. Volatility will have plateaued at this point. At this moment, holding the ETP would have a best-case scenario of being equivalent to holding the tech-heavy ETF itself. After this is the “grey zone”: market movement from this point onwards will determine which is the better choice.

Until then, holding the instrument is likely to have some tangible potential. This type of ETP – unlike “fixed-factor” ETPs – offers sophisticated investors access to a strategy that draws on the portfolio manager’s experience and alacrity at an affordable price point. In this case, it’s a strategy that effectively gives exposure to a tech-heavy market – via the QQQ ETF – while tempering/enhancing performance through a calculated and dynamic “inverse” bet on volatility – made possible via the VXX ETN. Given that these are two different classes of instrument, the ETP thus paves the way towards effectively delivering a strategy in a price-friendly manner. In other words, sophisticated investors are bound to find SVLT to be a very effective yet balanced strategy to gaining exposure to the tech-heavy top of the line in the American equity market.