A Different Kind of History Lesson (the VIX)

January 20, 2014 Attain Capital 1 Comment  Like
Macro Commentary

Happy Martin Luther King Jr. day to you all. It’s a great day to remember one of our nation’s heroes, but for many in the alternative investment space – this three day “market” weekend (stock and bond markets are closed today) brings back memories of a nasty little volatility spike back in 2008. Now, we all think back on 2008 and the huge volatility surrounding the financial crisis and Lehman bankruptcy and what not that fall (Aug. through Nov.)… but the first big warning shot across the bow was actually on MLK weekend (Jan 20th, 2008). The calls and emails started coming in on Sunday night – as the US stock index futures started opening up 4% to 5% lower based on Asian markets having sold off around 5%. A little trip in  the wayback machine brings us this from Barry Ritholtz’s early blogging efforts:

Holy Snikes! Dow Jones Industrial Average futures contract are off 520 points at 11,586; Nasdaq futures were at 1773.25, down 76.25. Standard & Poor’s 500 futures recently were at 1265, down 60.3. Let me hasten to remind you that this is “contained.” Imagine how much worse it would be like if it were not.

It was a move completely out of left field, even though the VIX had been moving up steadily since 2007 and some recession warnings had been starting to surface. Hardest hit were the option selling managers – who take in the insurance premiums against just this sort of thing happening – then are forced to pay out when it does happen. One rather painful example was Ascendant Asset Advisor’s Strategic 1 options program, which up until that fateful night could seemingly do no wrong (reminding us of the famed option turkey).

AscendantSource: Ascendant Options (Disclaimer: Past performance is not necessarily indicative of future results)

So here we are 6 years later (has it really been 6 years!! wow, time flies), and the complacency in the market is starting to look a lot like it did back then – with option selling managers again leading the top performing lists and seemingly unable to do any wrong. Will this down trend in volatility, and particularly the VIX – continue? Or are we likely to start getting texts and emails and Ritholtz “look out below” warnings one Sunday night soon.  If you’re a betting man or woman – well there’s an investment for you to place just that bet on whether a spike is coming – they are option selling managers, and they’ve been right a lot more than they’ve been wrong over the past two years… but can it continue. Stay tuned…

Vix 2007-Present(Disclaimer: Past performance is not necessarily indicative of future results) Source: Yahoo Finance

For those of you not technically in the alternatives world via managed accounts, but instead doing more staid investments (heavy sarcasm) in things like the inverse volatility ETN – XIV,  your equity curve is starting to look a whole lot like the fattened up turkey before his fateful day. Although – maybe it will add another 337% over the next two years, and the two after that, and so on. It only takes 10 years at that rate to turn $10,000 into $16 million – or $1 million into $16 Billion.  Of course – the market could see some volatility like it did six years ago, or even like it did in 2011 – where your $10k could be worth $1,600, or even $160.

XIV ETN(Disclaimer: Past performance is not necessarily indicative of future results) Source: Yahoo Finance

One comment

  1. Here It Is, The Big Sell-Off... Has Been Wrong The Past 169 Times - True Investment Research
    August 1, 2014

    […] is write about how this shows just how scary stocks can be… We’ve surely done it before (here, and here). To talk about how and why you should be diversified […]

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Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, RCM's own estimates of performance based on account managed by advisors on its books, 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.

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.

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.

See the full terms of use and risk disclaimer here.

Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, RCM's own estimates of performance based on account managed by advisors on its books, 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.

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.

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.

See the full terms of use and risk disclaimer here.