Bringing you live news and features since 2006 

Grandfather of VXX comments on VIX ETN rout

RELATED TOPICS​

Rampant selling pressures put enormous strain on ETF and ETN products based on the CBOE’s VIX Index this week, with the liquidation of two from Credit Suisse and Nomura and the temporary suspension of ProShares’s Short VIX Short-Term Futures ETF.

ProShares issued a statement commenting that the SVXY performance was consistent with its objective and reflected the changes in the level of its underlying index. REX Shares, LLC also announced that the REX VolMAXX Short VIX Weekly Futures Strategy ETF reopened for trading on Tuesday, February 6th, and expected to continue operating normally.

Glenshaw Capital’s Michael Schmanske, says that long term investors have been misled to believe they can effectively use volatility ETPs to protect their portfolios in a drawdown.

Schmanske founded Glenshaw Capital, an equity volatility hedge fund in July 2012, but earned the title ‘Grandfather of VXX’ having been a Managing Director at Barclays and the Head of Index Volatility trading. Prior to Barclays, Michael was the Head of US Index Volatility trading at Lehman Brothers.

Schmanske says: “I believe that the algorithmic products are to a degree broken and the internal leverage is the problem.”

He believes that Monday and Tuesday’s equity market volatility demonstrated the base case for volatility products and that they demonstrated their maturity over those two days with USD8 billion of vega traded on Monday. Vega represents the amount that an option contract’s price changes in reaction to a 1 per cent change in the implied volatility of the underlying asset.

“The problem is that these levered products have an internal trigger that collapsed which is why they are being abandoned by their backers,” he says.

“As long as the market continued in one direction it was fine. The problem is not with the VIX, the problem is that taking a volatile index and creating volatile products on top of this index is innately unwise.”

The reason these products have gained such a hold, Schmanske says, is that people get addicted to free leverage. “In a market where volatility doesn’t exist these leveraged products become extremely addictive but the problem is that they should have a skull and cross bones on them like cigarette packs which say ‘you can smoke these but they will kill you’.

Schmanske comments that these are trading vehicles not buy and hold investment vehicles. If these are version one products, Schmanske looks forward to Vol 2.0 products, which are actively managed volatility products.

One example of a Vol 2.0 product that he has been an adviser to is alternatives fund, the ABR Dynamic Blend Equity and Volatility Mutual Fund (ABRVX). This strategy makes it possible for investors to incorporate volatility in their long-term asset allocation models, he says.

“These are much safer for investors with no internal triggers that do forced unwinds,” he says. “When you create a dumb algorithm, it works like a dumb algorithm would work 99 percent of the time. It’s fine for many years of a low volatility environment when these products do exactly what they promised to do but one bad day and one bad element causes a flash crash and the product implodes.”

Monday and Tuesday’s dramatic markets were closer to the 2010 flash crash Schmanske feels. “It was more like the 2010 flash crash when something silly happens and creates a cascading effect. It’s not about the global equity markets in general as they are doing just fine.”

Latest News

US ETF issuers of active ETFs are facing an increase in fees from the big custodian firms, such as Charles..
ETF data consultant ETFGI reports that assets invested in the global ETF industry reached a new record of USD12.71 trillion..
Calastone has published an ETF white paper which examines several of the processes that take place across the lifecycle of..
Adapting product lines to fit into changing methodologies and meet shifting demand is essential to remaining relevant in the industry..

Related Articles

Taylor Krystkowiak, Themes ETFs
Themes ETFs opened its doors in December 2023, with an introductory suite of 11 ETFs – seven thematic and four...
Konrad Sippel, Solactive
At the end of March, financial index specialist, Solactive, published its 2024 annual report on future trends.  ...
Lorraine Sereyjol-Garros, BNP Paribas
Following changes to the French Monetary and Financial Code and of the French market authority AMF’s General Regulation, it is...
Ed Rosenberg, Texas Capital
Texas Capital Bank first opened its doors back in December 1998 and nowadays offers wealth-management services, as well as commercial,...
Subscribe to the ETF Express newsletter

Subscribe for access to our weekly newsletter, newsletter archive, updates on the site and exclusive email content.

Marketing by