PSC Insights
3 min read

The Daunting Task of Realizing Profits with a Tail Product

Published on
11 Jan 2022
Jaipal Tuttle
Quantitative Research, Portman Square Capital


This analysis explores the consequences of randomly entering and exiting trades in PSC, VXX, SPY, HYG, and TLT. We demonstrate that luck and market timing are the only way to generate returns with VXX, or by proxy, any simple tail hedge product.

Conversely, with PSC, the way to generate returns is to buy and hold (the sooner, the better due to its upward drift and market left-tail protection). SPY, TLT, and HYG are somewhere in between. Generally, buying and holding worked, but the current drawdowns of all three indicate that they may no longer be correct.

The Analysis

To see this, we randomly slice the data into the many possible realizations of potential outcomes for an investor who bought and sold during the product's life. The shortest holding period is one day, and the longest is its entire lifespan.

There are myriads of possibilities. So many in fact that it is only possible to sample a fraction of them. What if you bought on the Nth day and sold M days later, for example? After 10,000 slices, however, the outcome and probability are roughly known.

In the graphs that follow, the data range is from 25th Jan 2018 to 9th Mar 2022. The way to read the charts is to look at the X-Axis, the holding period in years. Then move your eyes vertically to see the possibilities for the P&L outcomes that occurred during that holding period. Of course, the more spread out the data cloud is the more uncertainty.

Less uncertainty is not always good, as in the case of VXX. Here we see that with a high probability, you have lost 50% of your money after about 2.5 years.

The final chart shows the minimum, maximum, and average number of days required to achieve that return and the probability of receiving it. You can see that it's extremely unlike you will have a windfall profit. For example, there is only a 1.4% chance of making more than double your money. Remember that occurs due to "super" timing skills. There is a 98.6% chance you would have traded it some other way and made less money. Of course, if you buy and hold, you are guaranteed to lose almost all your money eventually.

P&L earned from a 1M investment in PSC and VXX, with random entry and exit dates

This graph shows that the surest way to make money with PSC is to buy and hold. The most likely way to make any money with VXX is through market timing - both into and out of the trade. (Note the different scales on the Y-Axis).

P&L earned from a 1M investment in SPY, TLT, and HYG, with random entry and exit dates

Generally this shows that the surest way to make money was to buy and hold. The charts "rolling over" after long holding periods demonstrates that they are in drawdowns. (Note the different scales on the Y-Axis).


Click the link below to get in contact with Portman Square Capital