
A Tiny Hedge Fund Made 8,600% on a Vix Bet - apesti
https://www.bloomberg.com/news/articles/2018-02-09/vix-surge-hands-8-600-profit-to-a-tiny-hedge-fund-in-colorado
======
louprado
The scariest WSJ headline the week prior to when volatility started was the
following: "New account creation hits all time high at E-Trade, TD Ameritrade,
etc".

The stock market engine has been hot for 5 - 6 years now and we just threw a
can of nitro into the engine by way of massive tax cuts and deregulation. And
then pundits and our President brag about how awesome this ride is as if
managed growth is somehow anti-American. The retail investor masses heard that
message and have arrived. The masses that don't know the difference between an
income statement and balance sheet or how a market cap relates to the stock
price. Historically they have been a catalyst of instability and trade solely
based on the chart and trends.

So volatility seemed _obvious_ two weeks ago. But when an _obvious_ thought
arises regarding the market two quotes always come to mind:

"Far more money has been lost anticipating the correction than in the
correction itself". P. Lynch

"The first person you must not fool is yourself and you are the easiest person
to fool". R. Feynman

~~~
matt_wulfeck
> _The retail investor masses heard that message and have arrived._

The retail masses showed up many many years ago in the form of retirement
accounts. And we’ve also benefited tremendously from this bull market. This
last correction is nothing if you’ve been in the market for a few years.

Also I really doubt retail investors are the catalyst for anything here.
Normal people don’t move a trillion dollars out of the market in a few
minutes.

~~~
aphextron
>Also I really doubt retail investors are the catalyst for anything here.
Normal people don’t move a trillion dollars out of the market in a few
minutes.

Sure they do. Robo-advisor services like Betterment have exploded over the
past few years. They alone have over 10 billion under management right now.
When everyone's money is following the same algorithms, it's natural to assume
that any market movement will be magnified now.

------
anonu
In trading and the markets, you can beat the drums of war for as long as you
want. At some point you will be vindicated. Then everyone will look back at
you and think "genius!".

Ultimately, timing is everything. I can tell you markets will be X in Y time.
Within reason, there's a good chance it will happen. Question is just "when?"
The problem with strong views is whether they can be maintained. Being short
in a rising market or long in a falling one can be painful. Markets have a way
of wiping out your position (margin calls, psychological biases to losing
money and exiting) longer than you can hold on.

In these guys' case, timing was even more important- because of options
maturity dates. The article seems to allude to the fact that they rolled their
position forward multiple times: "For about a year, Ibex had been buying
options on the ProShares Short VIX Short-Term Futures ETF, ticker SVXY."

So the real question is how much money did they blow on premiums before the
final trade did well?

~~~
ajeet_dhaliwal
Do you write software? I don't get trading and I want to. I get programming.
If you understand both that's great. I even took one masters course (as part
of my bachelors degree) in financial mathematics about options, future,
derivatives etc. but it didn't click at the time.

I have funds to invest but every time I look into getting into I cannot bring
myself to do it because I cannot stop my brain thinking it's gambling. Without
insider knowledge I don't understand how I could beat the market short term.
In terms of long term investing in an index fund or ETF, that supposedly is
more sensible but that sort of feels like gambling too, in a way everything is
I suppose, buying a house is too, but I suppose you have to just get your
brain to get over it. There's no guarantee of anything.

~~~
justaguyhere
I feel the same. I can understand programming, business etc - anything that
involves creating something of value and exchanging it for something else of
value with money as the medium. Two things that I never understand are - high
end art market (a single painting is worth hundreds of millions of dollars,
really?) and stocks.

How is stocks not gambling? What exactly is being _created_ here? It is just
gambling and speculation, and for that these people (hedge funds especially)
get paid insane salaries? And many times they gamble with someone else's
money!!! This is incredible to my simple brain.

~~~
pjc50
Stocks are an entitlement to a future income stream, created by a the real
business of the company being invested in. It's just that there's a lot of
levels of indirection.

------
moomin
An obvious question: how often did they place this bet before it came off? If
they did it ten months in a row it would still be impressive. But the return
wouldn’t be quite as good.

~~~
erikig
This is true, looking at the chart for XIV if the placed this bet every month
for the last couple of years they may actually be down.

[https://finviz.com/quote.ashx?t=XIV&ty=c&ta=0&p=m](https://finviz.com/quote.ashx?t=XIV&ty=c&ta=0&p=m)

~~~
spelunker
Article says a year.

------
culturedsystems
I hadn't heard of the volatility index (VIX) until I read a short article
about it in the last issue of the London Review of Books. Might be worth
looking at of you want a little bit of background on this story:
[https://www.lrb.co.uk/v40/n02/donald-mackenzie/short-
cuts](https://www.lrb.co.uk/v40/n02/donald-mackenzie/short-cuts)

~~~
rsync
I highly recommend the London Review of Books - it is my favorite print
publication and has excellent current events and political writing (along with
the book reviews, which are also quite encompassing).

------
elmar
The other side of the bet just went bust.

Credit Suisse Fund Liquidated, ETFs Halted as Short-Vol Bets Die

[https://www.bloomberg.com/news/articles/2018-02-06/credit-
su...](https://www.bloomberg.com/news/articles/2018-02-06/credit-suisse-is-
said-to-consider-redemption-of-volatility-note)

~~~
elmar
The XIV security, which had fallen roughly 85 percent in after-hours Monday,
closed down 93 percent Tuesday. (and you think Cryptocurrencies are volatile)

[https://www.cnbc.com/2018/02/06/the-obscure-volatility-
secur...](https://www.cnbc.com/2018/02/06/the-obscure-volatility-security-
thats-become-the-focus-of-this-sell-off-is-halted-after-an-80-percent-
plunge.html)

------
sklut
I feel like a lot of the comments here are about how volatility of course will
go up at some point and these guys had lucky timing, or about the market in
general. But there's interesting tidbits to the whole thing beyond this.

What's interesting about this fund's particular bet isn't that they we're
_right_ about the market but they correctly bet that the structural ability of
the ETN/ETF product to properly hedge the risk associated with the fund goals
was either too difficult or in certain events literally impossible. And that a
certain event (like even what most would consider right now as a regular
correction) would blow up said fund. In fact, even bastard cousins of the fund
that are meant to do the exact opposite thing in these conditions may also
feel the same deathknell
([https://finance.google.com/finance?q=xiv](https://finance.google.com/finance?q=xiv)).

And just to look a little deeper into the bet itself... They were using
options (derivatives) on a fund (a derivative) using swaps (derivatives)
linked to the VIX (a derivative) which is a measure of volatility of an index
(a derivative) of the S&P components.

You too can replicate these winnings by just finding a niche mis-pricing on a
derivative of a derivative of a derivative of a derivative of a derivative of
a derivative!

------
Matt_Mickiewicz
The probabilities of black swan events are often grossly mispriced by the
markets. Looks like it paid off big time.

~~~
sfifs
The questions typically are (1) Can you find an instrument that lets you bet
on the mispricing (2) do you have the wherewithal to stay solvent for the
arbitrary period of time it takes for the market to correct.

Individual investors typically cannot access the right instruments (typically
weirdly structured long term options). Typical institutional money managers
cannot because their measurement typically penalizes continuous money loss.
Lots of them however may have spotted the opportunity.

~~~
meri_dian
Why can't individual investors access them?

~~~
mikeokner
You have to find a broker that will sell them to you. Usually these things
aren't vanilla options, they're some sort of quasi-option derivative.

~~~
2trill2spill
> Usually these things aren't vanilla options, they're some sort of quasi-
> option derivative.

Options are derivatives.

------
tbrock
I used to trade volatility and conventional wisdom is definitely not that the
Vix is always quiet.

The phrase I always heard and said is “we are picking up nickels in front of a
steamroller” in reference to shorting implied Vol. Everyone knows this is
bound to happen.

Although, the trick is that over a long enough time horizon implied volatility
is higher than realized. People are unnaturally scared of movement in the
market.

There are books published and read by almost all traders about this very event
by Nick Taleb.

------
inthewoods
Seems like pure luck with these guys - they didn’t seem to understand that the
issue was just a very badly designed financial product that was designed to go
to zero. Kudos to them for the win.

------
1024core
ELI5: what is the correlation between $VXX and $XIV ?

Over the past 2 years, they moved in tandem but opposite directions. But when
$XIV crashed, $VXX didn't go back to the corresponding price.

~~~
minimax
The XIV is (was) meant to track the _daily_ inverse of (roughly) the same
underlying index as VXX. So a 10% up day for the index should be 10% up for
VXX and 10% down for XIV. Now we can plug in rough approximations for Monday
2/5 and Tuesday 2/6.

The underlying index was up something like 90%. So VXX up 90% and XIV down
90%. Next day the index goes down 25% so VXX down 25% XIV up 25%. The two day
returns for VXX will be 1.90 * .75 = 42% up and the two day returns for XIV
will be 0.10 * 1.25 = 87.5% down. You can see how the _daily_ tracking blows
out the tracking over longer terms (just 2 days in this case). Since the VIX
moves had been relatively small on a day to day basis, it sort of looked like
they tracked each other on inverse terms over longer periods but it was just
an illusion.

------
JaggerFoo
I got a bit lucky. I bought UVXY before the correction as a hedge against a
correction. When my stocks were all declining the UVXY soared, which offset
the losses I had in stocks. Overall I ended up 2.5% and could have been up 5%
if I sold on the worst of it. But it's so volatile you don't know if it will
swing up higher.

Having a Robinhood account I could not buy options, but I didn't know about
the SVXY play anyways. Now I do, but who knows if SVXY will survive.

------
elmar
Explainer: Investors burned as bets on low market volatility implode

[https://www.reuters.com/article/us-global-markets-
volatility...](https://www.reuters.com/article/us-global-markets-
volatility/explainer-investors-burned-as-bets-on-low-market-volatility-
implode-idUSKBN1FQ2GL)

------
vfulco
Good for them. It is so painful taking better than average bets and being
questioned by family, friends, clients, peers. You even get caught
second/third/fourth guessing yourself. Great story.

------
ggm
As long as they can walk away without belief they had magic pixie dust. If
they think something about _them_ rather than (unrepeatably good) timing into
random movements won..

------
rbcgerard
The reason people laughed in these people’s faces is that trade they had on
cost ~10% a month and their time horizon was ~2.5years? Hmmmm

------
branchless
And a bunch of other people lost exactly the same amount, because none of them
are _creating_ anything.

~~~
bequanna
Remember, not everyone participating in the financial markets is simply
speculating.

Indeed, many market participants are hedging their business operations, future
production/consumption of physical commodities, etc.

So, when a speculator takes the opposite position of someone looking to hedge
risk value is created for the hedger. Sure, it's not necessarily tangible, but
it isn't nothing.

~~~
branchless
Agreed, but there is a huge, huge amount of people doing very little of value.
All the games with low latency and the rules for order placement could be
changed to greatly simplify and stop the race to ever-lower latency.

I work in it, it's a total waste of resources.

Our banking sectors are insanely large. Aren't they supposed to be efficient?
Why such a large % of the economy?

~~~
mrchicity
Why's it a waste? Low latency traders facilitate risk transfer in thousands of
instruments at razor thin margins using automation. They keep prices efficient
through arbitrage or predictive modeling. Even during extreme market stress I
can trade SPY in my brokerage account within a penny of its true value. If the
S&P 500 index futures or the S&P 500 stocks move, someone will update the
price of SPY instantaneously.

You want them competing with each other. To win they have to make the tightest
price before a competitor, which either lowers their margins or requires them
to bring new information to the market sooner.

If you accept that markets require intermediaries to bridge liquidity gaps in
time, place, and product, then high speed traders are far less wasteful than
the firms they replaced. Consider this: In 2000 Goldman Sachs bought Spear,
Leeds & Kellogg (SLK), a large NYSE dealer. SLK employed 2500 people and
earned over a billion dollars annually. That's one firm on one exchange. Each
market had thousands of men in jackets yelling at each other, making a much
bigger spread on transactions, and giving less accurate pricing.

Today there are a couple thousand people involved in low latency trading
across all markets/firms and the entire industry makes a few billion dollars a
year. Teams with a handful of quant researchers make markets in every listed
stock globally.

~~~
prklmn
How much of that is simply splitting pennies and front running slower traders?
Is that truely creating value? Seems like they’re siphoning value to me.

~~~
mrchicity
Not sure what you mean by splitting pennies, earning the bid/offer spread?
That's common but the person who paid the spread to them got to trade
instantly instead of waiting for another natural buyer or seller. The spread
is payment for providing a service, just like an insurance company earns the
spread between what you pay in premiums and their expected losses on claims.
High speed market makers compete with each other so the spreads they end up
earning are tiny.

The majority of high speed traders are trading their own account and don't
have customer orders to front run. If you prefer a loose definition of front
running to mean something like "reacting to changes in the market faster than
others" then yes, but I don't see anything problematic with using public data
to make your prices more accurate faster.

If you believe markets operate well without intermediaries, there are block
crossing services where institutional investors can try to match up with one
another. I'm sure institutions would prefer trading that way, but it turns out
finding someone trying to do the exact opposite trade at exactly the same time
is very difficult--volume transacted on these systems is small.

------
dynamodispatch
This isn't news. It happens all the time. During earnings season, whenever
there is a news break about pharma,tech,commodity, etc, whenever there is a
big political/environment/etc news, and when the market moves.

And 8600% isn't that impressive ( depending on the size of the bet ).
Leveraged bets can turn $1K into $1M or $10M overnight.

If you want impressive, go look into the returns in currency trading when the
swiss unpegged their franc a few years ago. If you had insider information,
you could have turned a few thousands into tens of millions easily.

This is really only news if this tiny hedge fund had insider knowledge.
There's nothing really newsworthy about this.

~~~
alva
Sounds like they were not leveraged. Any idiot can make super high leveraged
bets that will wipe them out if they don't pay off. Your comment suggests a
lack of understanding of risk. Max risk of 200k for 17m payoff is VERY
impressive.

~~~
OscarCunningham
It depends on the odds of it working, of course. 200k/17m is 1.2%, so any
idiot can arrange a bet which pays of 17m with 1.2% probability with at most
200k at risk.

~~~
alva
Of course they can. My comment was in context of the parent. Suggesting 8600%
return isn't that impressive is ludicrous and ignores the downside. Comparing
this bet to ultra-leveraged bets is silly.

