“Come play with us Danny”…
“Come and play with us, Danny”…
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.”
“…volatility across various asset classes can be at times highly correlated and hence the extraordinary growth of short volatility strategies might create risks.”
Handle with care.
Then they went skiing.
End of story.
This is a particularly touchy subject under normal circumstances and this week is not a week that falls in the “normal circumstances” category, which means this debate is even more contentious than it usually is.