Every ill-fated bull market has its signature bubble asset. In retrospect, these trades always come to epitomize the delusions of their times, whether it's the dot-com riches that tech stocks promised or the dream of American homeownership that underpinned the mortgage-backed securities boom.
No one knows exactly what class of asset will come to symbolize the markets of the 2010s. But thanks to Florida Target manager-cum-day trader Seth M. Golden, profiled today in the New York Times, there's a solid case to be made for VIX:
Each morning, at the market’s open, Seth M. Golden, a former logistics manager at a Target store, fires up the computer in his home office in northern Florida and does what he has done for years: Put on bets that Wall Street’s index of volatility, the VIX, will keep falling.[...]
“There has been a lot of white noise,” said Mr. Golden last Tuesday on a day that the VIX plummeted more than 10 percent, allowing him to lock in profits from short trades. “You had North Korea, Afghanistan, Trump people resigning. But I was never nervous — so today I just sat back, ate some popcorn and cashed in my profits.”
The Golden Method has had results. In five years, per NYT, Golden has grown his personal riches from around $500,000 to $12 million, mostly by habitually shorting volatility. Now, that track record has helped Golden drum up some $100 million in investments from people who are presumably to busy to buy XIV themselves and would like to pay someone to do it for them via a hedge fund.
This is as perfect a Markets In The Year 2017 story as we're likely to get. As is evident from VIX's disquieting chill over the past few quarters, the Seth Goldens of the world seem to be tilting markets in their direction. But that doesn't seem to bother them:
After every spike of fear must follow a longer period of calm, Mr. Golden contends, which, he argues, is a perfect scenario if your bias is to always bet against fear. “The nature of volatility is that it desensitizes over time,” he said. “Which is why the index has been tracking down for so long.” [...]
“Yes, it is a crowded trade,” Mr. Golden acknowledged. “But I don’t worry about crowds — I just worry what the next existential shock might be.”
Anyone who's been sentient for at least nine years can guess what the issue with a short-vol-centric hedge fund might be. Things look great on the way up! Not so hot on the way down. Depending on one's leverage, the shock, when it comes, could be devastating. See what would have happened to XIV between 2006 and 2008, had it been around (courtesy Six Figure Investing):
That plunge is a whole lot more painful than simply being long SPX during a crunch, particularly if you're leveraged (as Golden seems to be). Building an entire hedge fund strategy around such a doomed asset is reminiscent of Andrew Lo's Capital Decimation Partners, with shorting vol in the place of selling puts.
But here is why Golden is (probably) richer than you and will (probably) remain so. Of course he knows his strategy has an expiration date. What he needs is a hedge that gives him an income stream in a bear market. More precisely, he needs a hedge fund. Two-and-twenty on $100 million ain't bad for one, even if you discard the twenty. Who knows, maybe he can even launch an ETF.