What do these hedge fund strategies do?
They employ dedicated, active, long volatility strategies. Otherwise known as tail risk or convexity strategies. Active long volatility strategies look to profit from a market sell-off; like the 2020 stock market crash. They don’t rely on their portfolio eventually becoming negatively correlated to stocks (ehh hemm Managed Futures). They don’t rely on their historical negative correlation to stocks like Gold and Bonds. And they don’t rely on just being statistically non-correlated (the absolute return bucket). They actively set up their trades and portfolios to make money (at an increasing rate – what we call convexity) when the market sells off.
The simple example to this is buying Puts, which payoff when prices fall – not because that’s what’s always happened, but because that’s how the investment is actually structured. It can’t not make money when the market falls. More advanced examples of being long and short VIX futures at the same time – the long portion typically in the front months where volatility spikes most, and the short portion being in the back months which don’t spike as much – and erode similarly to help pay for the long exposure.
The trick with this type of strategy is being able to limit the cost of owning this long volatility exposure. In the owning Puts example, you would have to pay the premium month after month until the markets move down past your Puts. That gets expensive and is essentially the reason you see the long VIX ETFs lose money month after month. The professional managers in this strategy use several methods to limit this bleed, including many different flavors and methodologies in and around the aforementioned long/short VIX strategy, the use of cheaper proxies to own Put options on stock down moves (like Bonds or Gold as an invesment), and the use of short-term down capture strategies which use different flavors of volatility breakout type models to try and capture short term sell-offs.