It’s all about “loops” and “spirals” these days.
When the proverbial shit hits the fan, don’t blame risk parity and the trend followers. Rather, point the finger at the Target manager next door.
According to the latest read on this, the potential for an ETP rebalance to cause problems is still near record highs.
“With VIX futures several points below their historical average, a several point move would not be a tail scenario.”
“This vega-to-buy is at a record highs, almost doubling since mid-July on inflows to short VIX ETPs.”
That is all kinds of precarious for all kinds of reasons that should be obvious to anyone with any sense.
Listen, there is a non-negligible chance that you have unwittingly sowed the seeds of this market’s demise in your ill-advised attempt to make a side career out of being a vol. seller. And relatedly, if you’re someone who is long levered long VIX products, you too are in on this accidental plot to destroy the…
Remember “Investigating The Market’s ‘Nightmare Scenario’”? Of course you don’t. That post is from May and you’ve been drunk slept since then. But it was an important piece. Essentially, it outlined the potential consequences of the feedback loop that’s embedded in markets thanks to the proliferation of VIX ETPs and systematic strats that lever up…
” We take the contrary position and believe that a big devaluation might turn out instead be the final straw on the camel’s back of China’s credit bubble, leading to an even greater crisis.”
All’s well that ends well in Japan after a six-day slide. Or maybe not.
“It could happen tomorrow given the extreme expense of US equities and the near universal consensus of a continued acceleration in the economic cycle despite the Fed also in the midst of a tightening cycle.”
“…people think that even Chuck Norris can’t make money buying vol.”
But not like Beldar.
“Is this really sensible?!”…
“However, relative to CTAs there is much less transparency on the total size of assets in risk parity and equity vol control strategies let alone the subset of which is completely rules-based.”