27 ms·

A Tiny Hedge Fund Made 8,600% on a Vix Bet

131 points by apesti 9y ago

Matt_Mickiewicz 9y ago
The probabilities of black swan events are often grossly mispriced by the markets. Looks like it paid off big time.
- sfifs 9y ago
  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 9y ago
    Why can't individual investors access them?
    - mikeokner 9y ago
      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 9y ago
        > Usually these things aren't vanilla options, they're some sort of quasi-option derivative. Options are derivatives.
        deleted 9y ago
        [deleted]
    - drglitch 9y ago
      They can - just buy an put on the ETF via your favorite neighborhood broker like schwab, etrade, etc. Getting authorized for options trading on your account is pretty straight forward and serves as a last fair warning of how much money you're likely going to lose :) EDIT: to clarify, most of the "exotic" stuff like VIX and XIV (was) are ETFs that are accessible by "regular" investors and hide away the complexities of properly structuring the underlying position to get the exposure to certain aspect of the market. This opaqueness is what makes them so dangerous IMO.
    - senthil_rajasek 9y ago
      Sometimes brokerages prevent retail clients like in this story below, https://www.marketwatch.com/story/fidelity-prevents-retail-clients-from-trading-short-volatility-products-2018-02-09 https://www.marketwatch.com/story/fidelity-prevents-retail-c...
- vasaulys 9y ago
  I'm not sure that's true. Andrew Gelman once mentioned that Black Swan events are actually routinely _overpriced_ via the Longshot Bias. [1] He had talked about this in the context of the recent Leicester FC win and the odds on that team. [2] [1] https://en.wikipedia.org/wiki/Favourite-longshot_bias https://en.wikipedia.org/wiki/Favourite-longshot_bias [2] http://andrewgelman.com/2016/06/02/30183/ http://andrewgelman.com/2016/06/02/30183/
  - datamingle 9y ago
    Glass half full/Glass half empy. A bet against the opposite of an overpriced event will be underpriced.
moomin 9y ago
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 9y ago
  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 9y ago
    Article says a year.
culturedsystems 9y ago
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
- moondev 9y ago
  Great article, love his writing style as well.
- rsync 9y ago
  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).
inthewoods 9y ago
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.
elmar 9y ago
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-suisse-is-said-to-consider-redemption-of-volatility-note https://www.bloomberg.com/news/articles/2018-02-06/credit-su...
- elmar 9y ago
  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-security-thats-become-the-focus-of-this-sell-off-is-halted-after-an-80-percent-plunge.html https://www.cnbc.com/2018/02/06/the-obscure-volatility-secur...
- elmar 9y ago
  Obscure security linked to stock volatility plummets 80% after hours, sparking worries of bigger market effect https://www.cnbc.com/2018/02/05/xiv-exchange-traded-security-linked-to-volatility-plummets-80-percent.html https://www.cnbc.com/2018/02/05/xiv-exchange-traded-security...
- rsync 9y ago
  "The other side of the bet just went bust." I don't think it's accurate to say it "went bust". In fact, Credit Suisse had a (oft ignored) provision in the prospectus of the ETN that very clearly stated that they would liquidate and terminate the product if it exhibited certain behaviors. Credit Suisse built the product "safely" in a way that did not expose them to losses. The "investors", however, who were almost certainly using the ETN incorrectly, were exposed to heavy losses: https://www.zerohedge.com/news/2018-02-06/xiv-trader-loses-4-million-and-3-years-work-here-his-story https://www.zerohedge.com/news/2018-02-06/xiv-trader-loses-4... "incorrectly", in this context, would be anything other than very, very short (less than one day) holding to hedge other risks.
anonu 9y ago
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 9y ago
  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.
  - amenghra 9y ago
    If you keep your wealth as cash, it will get wiped out over time by inflation. Now let’s imagine that you have enough money to buy 4 houses in a city/location you want to live in for the long term. I would say that’s pretty low risk because your cost of living is going to be roughly the same as what you can earn by renting out your 4 houses. I.e. you’ll be able to live off your rental income forever. Therefore there are investment strategies that aren’t equivalent to gambling.
louprado 9y ago
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
- dominotw 9y ago
  How do you define " managed growth" ?
- matt_wulfeck 9y ago
  > 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 9y ago
    >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.
elmar 9y ago
Explainer: Investors burned as bets on low market volatility implode https://www.reuters.com/article/us-global-markets-volatility/explainer-investors-burned-as-bets-on-low-market-volatility-implode-idUSKBN1FQ2GL https://www.reuters.com/article/us-global-markets-volatility...
JaggerFoo 9y ago
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.
branchless 9y ago
And a bunch of other people lost exactly the same amount, because none of them are creating anything.
- erikig 9y ago
  Technically, these people are hedging their portfolios. Just like insurance premiums don't create anything during periods of zero losses (they may actually seem like a loss themselves), holding these leveraged VIX ETFs can be used to protect one's portfolio.
  - mrchicity 9y ago
    Please read the prospectus for these products. Leveraged ETFs aren't appropriate for long term hedging.
- bequanna 9y ago
  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 9y ago
    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?
    - bequanna 9y ago
      > Our banking sectors are insanely large. Aren't they supposed to be efficient? Why such a large % of the economy? Are they? What is the appropriate size of a nation's banking sector as a % of GDP (or whatever)? Who decides this? This is still a free(ish) market. Anyone who can provide the same services/capture the same opportunities with fewer resources is rewarded.
dynamodispatch 9y ago
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 9y ago
  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 9y ago
    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 9y ago
      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.
1024core 9y ago
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 9y ago
  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.
tbrock 9y ago
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.
rbcgerard 9y ago
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
sklut 9y ago
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!
ggm 9y ago
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..
vfulco 9y ago
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.

131 points by apesti 9y ago

Matt_Mickiewicz 9y ago

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

sfifs 9y ago
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 9y ago
  Why can't individual investors access them?
  - mikeokner 9y ago
    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 9y ago
      > Usually these things aren't vanilla options, they're some sort of quasi-option derivative. Options are derivatives.
      - deleted 9y ago
        [deleted]
  - drglitch 9y ago
    They can - just buy an put on the ETF via your favorite neighborhood broker like schwab, etrade, etc. Getting authorized for options trading on your account is pretty straight forward and serves as a last fair warning of how much money you're likely going to lose :) EDIT: to clarify, most of the "exotic" stuff like VIX and XIV (was) are ETFs that are accessible by "regular" investors and hide away the complexities of properly structuring the underlying position to get the exposure to certain aspect of the market. This opaqueness is what makes them so dangerous IMO.
  - senthil_rajasek 9y ago
    Sometimes brokerages prevent retail clients like in this story below, https://www.marketwatch.com/story/fidelity-prevents-retail-clients-from-trading-short-volatility-products-2018-02-09 https://www.marketwatch.com/story/fidelity-prevents-retail-c...
vasaulys 9y ago
I'm not sure that's true. Andrew Gelman once mentioned that Black Swan events are actually routinely _overpriced_ via the Longshot Bias. [1] He had talked about this in the context of the recent Leicester FC win and the odds on that team. [2] [1] https://en.wikipedia.org/wiki/Favourite-longshot_bias https://en.wikipedia.org/wiki/Favourite-longshot_bias [2] http://andrewgelman.com/2016/06/02/30183/ http://andrewgelman.com/2016/06/02/30183/
- datamingle 9y ago
  Glass half full/Glass half empy. A bet against the opposite of an overpriced event will be underpriced.

moomin 9y ago

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 9y ago
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 9y ago
  Article says a year.

culturedsystems 9y ago

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

moondev 9y ago
Great article, love his writing style as well.
rsync 9y ago
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).

inthewoods 9y ago

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.

elmar 9y ago

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

elmar 9y ago
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-security-thats-become-the-focus-of-this-sell-off-is-halted-after-an-80-percent-plunge.html https://www.cnbc.com/2018/02/06/the-obscure-volatility-secur...
elmar 9y ago
Obscure security linked to stock volatility plummets 80% after hours, sparking worries of bigger market effect https://www.cnbc.com/2018/02/05/xiv-exchange-traded-security-linked-to-volatility-plummets-80-percent.html https://www.cnbc.com/2018/02/05/xiv-exchange-traded-security...
rsync 9y ago
"The other side of the bet just went bust." I don't think it's accurate to say it "went bust". In fact, Credit Suisse had a (oft ignored) provision in the prospectus of the ETN that very clearly stated that they would liquidate and terminate the product if it exhibited certain behaviors. Credit Suisse built the product "safely" in a way that did not expose them to losses. The "investors", however, who were almost certainly using the ETN incorrectly, were exposed to heavy losses: https://www.zerohedge.com/news/2018-02-06/xiv-trader-loses-4-million-and-3-years-work-here-his-story https://www.zerohedge.com/news/2018-02-06/xiv-trader-loses-4... "incorrectly", in this context, would be anything other than very, very short (less than one day) holding to hedge other risks.

anonu 9y ago

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 9y ago
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.
- amenghra 9y ago
  If you keep your wealth as cash, it will get wiped out over time by inflation. Now let’s imagine that you have enough money to buy 4 houses in a city/location you want to live in for the long term. I would say that’s pretty low risk because your cost of living is going to be roughly the same as what you can earn by renting out your 4 houses. I.e. you’ll be able to live off your rental income forever. Therefore there are investment strategies that aren’t equivalent to gambling.

louprado 9y ago

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

dominotw 9y ago
How do you define " managed growth" ?
matt_wulfeck 9y ago
> 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 9y ago
  >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.

elmar 9y ago

Explainer: Investors burned as bets on low market volatility implode https://www.reuters.com/article/us-global-markets-volatility/explainer-investors-burned-as-bets-on-low-market-volatility-implode-idUSKBN1FQ2GL https://www.reuters.com/article/us-global-markets-volatility...

JaggerFoo 9y ago

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.

branchless 9y ago

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

erikig 9y ago
Technically, these people are hedging their portfolios. Just like insurance premiums don't create anything during periods of zero losses (they may actually seem like a loss themselves), holding these leveraged VIX ETFs can be used to protect one's portfolio.
- mrchicity 9y ago
  Please read the prospectus for these products. Leveraged ETFs aren't appropriate for long term hedging.
bequanna 9y ago
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 9y ago
  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?
  - bequanna 9y ago
    > Our banking sectors are insanely large. Aren't they supposed to be efficient? Why such a large % of the economy? Are they? What is the appropriate size of a nation's banking sector as a % of GDP (or whatever)? Who decides this? This is still a free(ish) market. Anyone who can provide the same services/capture the same opportunities with fewer resources is rewarded.

dynamodispatch 9y ago

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 9y ago
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 9y ago
  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 9y ago
    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.

1024core 9y ago

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 9y ago
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.

tbrock 9y ago

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.

rbcgerard 9y ago

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

sklut 9y ago

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!

ggm 9y ago

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..

vfulco 9y ago

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.