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Jumat, 16 Februari 2018

Investors are piling back into an infamous trade that just blew up

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Investors are piling back into an infamous trade that just blew up

  • The short-volatility trade imploded last week, as a sharp spike in the Cboe Volatility Index, or VIX, wiped out positions.
  • That hasn't stopped investors from continuing to pile into short-VIX products, even on the heels of a stock market correction that the strategy helped fuel.



Investors have wasted no time in piling back into a now-infamous trade that recently blew up.

They've poured more than $575 million into the ProShares Short VIX Short-Term Futures ETF (SVXY) since the start of the stock market's correction back on February 2, according to Bloomberg data. At a time when volatility has come raging back, the inflow activity shows a continued willingness to bet against price swings in equities.

Designed to return the inverse of the Cboe Volatility Index, or VIX, the fund was blamed for exacerbating the stock market's drop of more than 10%. The fund and the VelocityShares Daily Inverse VIX Short-Term ETN (XIV) lost roughly 95% of their combined value last week when the underlying VIX more than doubled in a single day.

That triggered a swift unwinding in the short-volatility trade as investors were forced to buy VIX to close their positions. The implosion was ultimately blamed for the late-day selling that contributed to a 4.1% one-day drop in the S&P 500.



The argument can be made that investors have failed to learn their lesson following the massive declines in SVXY and XIV. After all, according to the flows outlined above, SVXY has kept chugging along just fine, even as the suspension of XIV looms. Apparently there's still a large contingency of VIX bears who are now looking to rebuild short positions at more attractive prices.

The continued short of the VIX is sure to draw the consternation of the experts across Wall Street who repeatedly criticized the strategy leading up to its meltdown.

Those experts include Marko Kolanovic, JPMorgan's global head of quantitative and derivatives strategy, who has in the past said the shorting of volatility reminded him of the conditions leading up to the 1987 stock market crash. Alain Bokobza, Societe Generale's head of global asset allocation, is also likely to be perturbed, considering he once likened shorting the VIX to "dancing on the rim of a volcano."

Morgan Stanley's chief US equity strategist, Mike Wilson, however, thinks the situation is far less dire than before, and argues the big drop in short-volatility products actually helped flush out risky positions.

"We cleansed a risk that was out there for the marketplace," he told Business Insider in a recent interview. "The market handled this risk very efficiently. If we ever do have a real fundamental sell-off or recession, people are worried that there's going to be unlimited selling from these strategies, but I think that's wrong."
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