How can daily rebalancing and volatility affect the performance of 2x short equity indices?
2x short equity indices are designed to provide the inverse of twice the inverse of the daily percentage change in the level of their reference index (i.e. the 1x index) and due to the compounding of daily returns, returns measured over periods longer than one day may differ from twice the inverse of the reference index return over that longer period. To demonstrate this we take the example of a reference index falling 5% over a 5-day period. In Scenario 1 the index achieves the -5% return through various down and up days. In Scenario 2 the index is down 5% over the period following 5 consecutive down days. (For simplification purposes, these 2 scenarios exclude fees and other financing adjustments).
