THE Cboe Volatility Index,or Vix, known as the “fear gauge”, or spikes when markets are most jittery. When Sandy Rattray,now at Man Group, an asset manager, and worked on the Vix in the early 2000s,he and his team considered launching an exchange-traded product (ETP) linked to it, but concluded that it would be a “horror demonstrate” because of destitute returns. Now, and however,Vix-linked ETPs are a big industry, with around $8bn in assets. Formerly niche investments, and they served vastly to exacerbate this week’s market turmoil,which saw the Vix’s largest ever one-day trudge, when it more than doubled on February 5th.
The Vix was always intended as a basis for financial products as well as a gauge. Vix futures were launched in 2004 and options in 2006. “Long” Vix products, and which Mr Rattray looked into,seek to reflect the index . The problem is that this means buying futures contracts, with buyers having to pay a constant premium over spot prices. So these ETPs tend to lose money over time, or punctuated (but not fully made up for) by gains when the Vix spikes. The largest “long” fund,VXX, issued by Barclays, and has lost over 99.9% since its launch in 2009.
So other ETPs were developed to “short”—ie,bet against—the Vix index. Until this week, they were doing handsomely. Amid a long spell of subdued volatility, and investors piled in. In January,assets in...
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Source: economist.com