With stocks sliding further and further down the rabbit hole despite a short boost from a friendly jobs report, volatility is continuing to expand at a rapid rate. Yesterday, the VIX surged 35% to close at its highest levels this year since the Japan quake in March, and today, it jumped another 22% to 38.55- the highest intraday level since May 2010.
What does this mean? As a refresher, the VIX, or Volatility Index, shows the market’s anticipation of 30-day volatility. It is calculated with the implied volatilities of a variety of S&P 500 index options with both puts and calls, and is intended to be predictive. Typically, people view the VIX as a measure of investor fear and market risk, so when the VIX goes up, it indicates potentially higher risk and fear, whereas when it goes down, it’s supposed to signify market confidence.
There are a few interesting things to note here. First, it wasn’t that long ago that we discussed the concept of Zombienomics presented by David P. Goldman. He argued that the economy would continue to slump around in low volatility levels, but would not fully recover for years. Our response? Verbatim:
History is ripe with examples of low volatility periods ending with spikes higher in volatility, and indeed it is often used as a contrary indicator for upcoming market declines.
Is an “I-told-you-so” appropriate here? The point is, when dealing with periods of low volatility, things are usually ok… until they aren’t. This is the VIX over the past 5 days. The severe upward slope started yesterday- no gradual build up in sight. If we see another surge, the VIX could theoretically double within a two day period.
For managed futures investors, the question weighing on everyone’s mind is how this is going to impact their portfolios. First, if you have a stock index option selling manager in your portfolio – the volatility spike is not a good thing. They are selling the very thing which has nearly doubled in price, which is tough to get through without losses.
But outside of option sellers, such volatility spikes are usually a good thing for managed futures and trading systems, which, unlike option sellers, usually have a long volatility profile. This profile is a result of risking a fixed amount per trade (usually a percentage of equity), but allowing the models to earn as much as the market will allow them to. When volatility spikes and markets start moving drastically – the amount of potential profit expands dramatically, while the risk remains at the same level. In contrast, an option seller has a fixed amount they can make, while the amount of loss can blow out dramatically based on what the market is doing. They are, in many ways, mirror images of one another.
Pundits are all over the place as far as what comes next. There are predictions of a 75% price correction, and our Twitter feed is a-buzz with folks saying we’ll see the markets bounce back big by the end of the day. We don’t know what will transpire, and while the possibility of large single day losses for managed futures and trading systems has increased with the increase in volatility, the general affect of the VIX spiking should be beneficial to managed futures and trading systems, in our opinion.
Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.
The programs listed here are a sub-set of the full list of programs able to be accessed by subscribing to the database and reflect programs we currently work with and/or are more familiar with.
Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history. Individuals cannot invest in the index itself, and actual rates of return may be significantly different and more volatile than those of the index.
Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.
Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.
Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.
RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.
Limitations on RCM Quintile + Star Rankings
The Quintile Rankings and RCM Star Rankings shown here are provided for informational purposes only. RCM does not guarantee the accuracy, timeliness or completeness of this information. The ranking methodology is proprietary and the results have not been audited or verified by an independent third party. Some CTAs may employ trading programs or strategies that are riskier than others. CTAs may manage customer accounts differently than their model results shown or make different trades in actual customer accounts versus their own accounts. Different CTAs are subject to different market conditions and risks that can significantly impact actual results. RCM and its affiliates receive compensation from some of the rated CTAs. Investors should perform their own due diligence before investing with any CTA. This ranking information should not be the sole basis for any investment decision.
See the full terms of use and risk disclaimer here.