Everyone should take a breath
AS STOCKS maintained their smooth and steady climb in recent years, few trades were as alluring, or as profitable, as a bet that volatility as measured by Wall Street’s socalled fear gauge had vanished.
Hedge fund titans and day traders have poured billions of dollars into opaque, debtfuelled funds known as exchange-traded notes.
Now stocks are swinging wildly, and investors who piled into these funds are getting rattled. On Tuesday, Credit Suisse, the sponsor of the most popular fund for making such bets, said it was closing down the fund.
Credit Suisse closed the fund – informally called XIV, which moves in the opposite direction of the fear gauge, known as VIX – after it experienced a fall of greater than 80 percent.
VIX, which measures investor expectations that stocks will rise or fall sharply in the future, has been at extreme lows in recent years, making XIV very attractive to investors and pushing it to $1.8 billion in size.
In the two years from January 2016 to the middle of last month, XIV’s value shot up more than 500 percent, reaching a recent peak of $134.
After VIX surged on Monday, XIV dropped like a rock, falling from $99 to $7 in after-hours trading.
In just two days, investors in XIV and a similar fund, ProShares Short VIX Short Term Futures (SVXY), saw their assets shrink dramatically, from a combined total of $3 billion to about $150 million.
“People are scared out of their minds – they are in really rough shape,” said Seth Golden, who left his job as a manager at a Target store to take up shorting VIX as a full-time business from his living room in Ocala, Florida.
Profiled in the New York Times last summer, Golden exemplifies how easy it has become to gamble on whether volatility in the stock market will be high or low.
Golden’s preferred vehicles are the iPath S&P 500 VIX Short Term Futures and ProShares Ultra VIX Short-Term Futures, which he has been betting against for years in trades that had been lucrative – until now.
After VIX shot up 100 percent, the largest move in its history, to 35.73 on Monday, Golden acknowledged that he was feeling some pain. On Tuesday, the index spiked again, reaching 50 before falling back to just below 30.
“It is really stressful,” he said. “I was up until the wee hours, checking my phone to see where VIX futures were trading.”