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Futuristic Eskimo

Futuristic Eskimo

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Futuristic Eskimo said:
Most products walk a fine line between making economic sense and being speculative. It depends who is trading it and for what purpose:yeshrug:

Products like the XIV ETF that imploded, where retail piled in, didn't understand the risks associated with the product and then lost all their money, I would be more inclined to say are speculative garbage. More complicated derivative products where professional traders are hedging risk in their portfolio are different.

This investigation into VIX manipulation is interesting, though. I wouldn't be surprised if it concludes that a main driver of record-low volatility recently was that major players have been keeping it down through the S&P index options. Should be a big story if so.
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@Broke Wave

Part of a note from a quant researcher named Kolanovic (man has made some prescient calls in the past few years) from JPM:

Selling of equity index risk premia (via implied correlation, volatility, skew, etc.) is a strategy that underwrites insurance on an inherently risky asset. These strategies are well documented (over 3 decades) and have strong theoretical justification. The risk-reward profile of these strategies is highly ‘non-Gaussian,’ and there is a trade-off between the typically high Sharpe ratio but also high downside tail risk. Over time, and when properly risk-managed, these strategies work well (equally well as underwriting insurance, e.g., for natural disasters). Fires, hurricanes, and market sell-offs do happen, and this is a normal part of an insurance strategy cycle.

Of course one needs to understand the risk/reward, and manage exposure and tail risk. This is where some investors or products might have miscalculated and suffered large losses. If one is collecting a 20% or 30% premium (return) per month, one should suspect that there is a significant risk for the loss of entire principal (e.g., similar as with credit – which is another form of insurance). We pointed to this in our previous reports and it was covered in press extensively before the recent events.

However, history shows that insurance strategies tend to work better in the aftermath of ‘disasters,’ when the level of premia is elevated, there is less market participation and leverage, and the probability of another tail event might be lower.
 
Futuristic Eskimo

Futuristic Eskimo

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James Hurley said:
Ray Dalio says 'recession is now' and has massively shorted a lot of Europe's biggest companies.
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It's an odd call to me. ECB isn't going to make the same mistake with tightening too quickly again and I'm not seeing any glaring internal downside catalysts.

It would have to be an external shock (e.g. China, US) to bring European stocks down. Most likely a de facto bet on a Chinese economic downturn if Bridgewater is actually net short.
 
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