Are You the Dumb Money? Chapter 1: Short Vol Traders


This week witnessed the implosion of the short volatility trade, wiping out or significantly impairing a large number of speculators from day traders to mid-size hedge funds.

I admit upfront that I am a bit gleeful about this one. When the TVIX hit an all time low of 5.50 I bought quite a bit. It was clear (as clear as it can be in a world of uncertainty) that volatility could go a bit lower – it had before – but not too much lower. So this thing had about a 40% downside and a huge upside. Sure enough, it went down into the 4’s, but then the inevitable happened. I sold it all around 13-15.  The easiest trade of my life.

But a caveat: this is not a trader’s blogsite. We are developing analytics aimed at ferreting out the charlatans and the alchemists of active money management and we are strong believers in passive investment management.

Most of what you are going to read here is going to try to convince you that it is futile for you to try to beat the market most of the time. The reason is simply this: there are far too many ways for you to underperform the market. Jan Hendrik Witte and I (and our valued co-author Nick Polson) wrote Why Indexing Works to explain why, and Oliver Renick at Bloomberg Markets (before he went to be a star at TD Ameritrade’s new show) wrote a terrific article on our piece and related work. More on that article later.

But occasionally there are opportunities that are so obvious that we will talk about them here. Long vol in late 2017, early 2018 was one of those.

If you were short vol on February 5, 2018 either (1) to the extent of most of your investable wealth; and/or (2) without being “reinsured” at the insanely low prices available to put purchasers or TVIX, etc. purchasers in the market, then you were the dumb money.

If you invested with a fund – like  Chicago-based LJM Partners Inc. – that literally told you it was doing pretty much nothing but this – then you are the dumb money.

If you kept selling vol after I warned you to buy the TVIX (you know who you are!), then you are the dumb money.

All I can say is, “C’mon Man!