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Low-Vol ETN Dies Of Irony

It was at least a partially self-inflicted existential wound.
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Lots of firms, including Credit Suisse, have been giving people a chance to bet against volatility. This has been a really great trade! And it’s gonna be an even greater trade going forward, according to Credit Suisse:


“History shows that investing following spikes in Volatility tends to lead to above average returns,” the strategists wrote, pointing to data on buying into those two stock indexes when volatility is elevated.

Quick, everyone: Buy the XIV! (VIX backwards—get it?) No luck? That’s right, you can’t, because the kind of volatility exemplified by 1,100-point DJIA drops has the nasty side effect of killing low-volatility bets.

The last day of trading for VelocityShares Daily Inverse VIX Short-Term exchange-traded note (XIV) will be Feb. 20, according to an announcement from Credit Suisse. The bank is triggering this liquidation because the product during these last three volatile days could not keep up with the scenario it was supposed to track: a calm market.

The XIV security, which had fallen roughly 85 percent in after-hours trade, had been halted pending this news early Tuesday…. Multiple exchange-traded securities that are also supposed to be bets on calm markets were halted Tuesday after losing the majority of their value overnight.

As it happens, however, the death of XIV wasn’t just the predictably result of a collapse in the equities market, but a kind of suicide.

In a prescient research paper published in November, Vineer Bhansali, founder of investment advisory firm LongTail Alpha, and Professor Larry Harris of the USC Marshall School of Business explained how such a dramatic move might happen, and warned that “the extraordinary growth of short volatility strategies creates risks that may trigger the next serious market crash.”

The paper suggests that the growth in the use of such strategies and the correlation between them risked a dramatic reversal as investors scramble to cover their short positions.

Credit Suisse Navigates the Volatility Cross-Currents [WSJ]
Credit Suisse says it will end trading in the volatility security that’s become the focus of this sell-off [CNBC]
How Bets Against Volatility Fed the Stock Market Rout [WSJ]


Photo: Getty Images.

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