With short-volatility ETPs, such as VelocityShares Daily Inverse VIX Short-Term ETN (XIV.P), the ProShares Short VIX Short-Term Futures ETF (SVXY.P), and VelocityShares Daily Inverse VIX Medium-Term ETN (ZIV.O), all logging massive losses, traders who had bearish bets against these products have much to be happy about.
Does this represent a turning point in the global equity bull run, or merely a shift from a low-volatility to high-volatility regime?
A strategy of betting against turbulence in equity markets.
Second, there is implied volatility.
XIV is issued by Credit Suisse and is supposed to give the opposite return of the VIX. Low, or falling volatility regimes on the other hand, have seen significant gains in equities as investors have used such times to add exposure to risky assets.
At the root of the selling are concerns over inflation and rising interest rates, which have pushed up bond yields at the expense of stocks.
But the risk of the latter grows the longer financial volatility measures stay high.
A November paper by Bhansali and Lawrence Harris, a professor at USC Marshall School of Business, estimated that total assets under management in volatility-contingent strategies is about $1.5 trillion, including implicit volatility sellers such as risk parity funds, volatility targeting funds, risk premium harvesting funds and trend followers. As for the wider global markets, funds and banks face limits on the amount of risk they can hold on their books. Here are seven charts that put this move and the spike in volatility in context.
But this week's brief spike above 50 and its subsequent partial retracement to below 30, more than double its trading range past year, has turned the spotlight on such strategies. Those are moves that should be well within expectations for normal market behavior.
Nobody is quite sure exactly what caused the market crunch and the volatility spike, but some of the key protagonists in this drama seem to be a group of hedge funds and exchange-traded funds that had large short volatility positions. Barclays said there are now around $350 billion of assets under management in this type of strategy.
Q: The recent drop in the stock market makes me very nervous. Indeed, three month implied volatility for the euro this week is well below 2017 highs.