But let's not be hasty. Volatility may be a dog as a buy-and-hold proposition, but its negative correlation with return is a powerful antidote for market crashes. Ideally, you'll buy the VIX on the eve of a crisis.

Carol Alexander and Dimitris Korovilas, at the U.K.'s University of Reading wrote about the problem in a recent working paper, "The Hazards of Volatility." "The problem is," they wrote, "that such crises are extremely difficult to predict and relatively short-lived. In other words, equity volatility is characterized by unexpected jumps followed by very rapid mean reversion, so expectations based on recent volatility behavior are unlikely to be realized." Once it's clear that a new crisis is here, "it is usually too late to diversify into volatility," they warned.

A Solution?
Enter a new breed of hedging strategies that are intent on preserving volatility's natural contrarian profile during market crashes without breaking the bank as a long-term holding and perhaps even turning a modest profit over time. Easier said than done, but several investment banks are now selling products linked to indices that are designed to offer a solution:
Deutsche Bank's "Emerald" index (short for "Equity Mean Reversion Alpha") is one example. Another comes from Barclays, which recently began offering a competing product tied to its Astro Index (short for "Algorithmic Short Term Reversion.") BNP Paribas is also a player in the niche, although it hasn't yet started selling a direct competitor to Emerald or Astro in North America.

These benchmarks can theoretically be tied to any standard market index by way of structured notes sold by the sponsoring bank. The most popular pairing is with the S&P 500, a proxy for the U.S. stock market. In that case, an investment in Emerald or Astro delivers the return of the underlying benchmark plus the performance of the S&P 500, less expenses. You can think of it as an enhanced S&P 500 index fund that seeks to limit the extremes of a market crash without materially reducing the stock market's long-run expected return.

Thanks to the turmoil in the wake of 2008, there's broad appeal for the likes of Emerald and Astro. "The market collapse in late '08 is what started us down this road," says Jerry Miccolis, chief investment officer at Brinton Eaton, a Madison, N.J., wealth manager that holds Emerald- and Astro-based products in client portfolios.

Joe Scarpo, chief executive officer of Private Wealth Advisors in Pittsburgh, describes a similar search that led his firm to recently allocate a portion of client assets to Emerald. "We were looking for some type of alternative that gives us the opportunity to profit from market volatility," he says.

At the heart of Emerald, Astro and comparable rules-based strategies is an expectation (some might call it faith) that mean reversion in market returns will prevail. Above-mean performance tends to lead to below-mean returns, and vice versa. Laurence Black, director of quantitative indices and strategies at Barclays in New York, summarizes the Astro Index as a strategy offering "access to mean reversion in volatility, which historically has worked well in times of market stress."

The strategic engine for tapping mean reversion in Emerald and Astro is the continual coupling of a long position in daily S&P 500 volatility with the shorting of the stock market's weekly level of volatility. Think of the long side of daily volatility as comparable to owning the VIX. If the stock market tanks, volatility is likely to spike. Thus, the daily long volatility trade will provide the heavy lifting for offsetting a loss in a market crash. But, as noted above, a dedicated allocation to long-only volatility alone will likely be costly in the long run.

That's where the short weekly volatility position helps. This part of the strategy is designed to neutralize long volatility's high cost on a buy-and-hold basis. The short position's goal amounts to financing the long-term holding costs that accrue with long volatility. The assumption is that the sum adds up to more than the parts.

A Closer Look At The Short Side
Selling volatility as a stand-alone trade is no stranger to researchers or traders, nor is it beyond the pale to describe it as a profitable strategy in its own right-most of the time. A market crash can devastate traders with naked short volatility positions. But if crashes are rare, expected return is generally positive for short volatility positions over time.