Yesterday’s historic VIX move already destroyed an entire asset class: the inverse VIX ETN are no more, meaning retail no longer has a handy, convenient way to short vol, which incidentally is for the better. Unfortunately, what it means is that retail will now simply short VIX ETNs like VXX, exposing themselves to unlimited downside risk but that’s what natural selection is all about.
“Yesterday’s move has certainly generated a lot of damage for all implicit short volatility strategies, including trend followers,” said Nicolas Roth, head of alternative assets at Reyl & Cie, envisioning pretty much everyone these days, including both professional and retail investors. “Most systems are designed somehow to capture trends and this sell-off appeared out of nowhere for a quantitative system.”
Still, one thing that was missing in the chaos following yesterday’s vol explosion was specific asset manager names that got crushed: after all, someone must have gotten the proverbial margin call tap on the shoulder.
And while a list of casualties is still missing, a few names have emerged courtesy of Bloomberg. One is the UK’s Man Group, which tumbled as much as 7.9%, the most in almost a year, as one of the firm’s main funds dropped on rising volatility, with stock volume more than double the ADV of the past three months.
Man AHL Diversified Futures plunged about 4.6% on Monday as market trends suddenly reversed, leaving the fund flat for the year, according to a person with knowledge of the matter. The strategy “had a very bad day yesterday, that’s not a surprise,” said David McCann, an analyst at Numis Securities Ltd. “That’s in the context of some very good performance year-to-date.”
One firm that according to preliminary reports was the closest to a near-death experience, was Option Solutions LLC. The hedge fund that trades equity options lost as much as 65% after it was forced to sell holdings overnight, according to a Bloomberg report. The good, so to speak, news is that the fund remains in business and will waive its incentive fee for new investors until the fund returns to its high watermark. Considering the size of the handicap, that will probably never happen, although it is not clear if anyone will notice: the firm had managed about €65 million before the losses.
“The market became completely illiquid as volatility increased far in excess of the market movement,” Paolo Compagno, a partner at the London-based firm, said in an email to investors seen by Bloomberg News. “We were forced to liquidate throughout the night and morning.”
To be sure, some funds were delighted by the surge in volatility, which was a long time coming for the $325 million True Partner, and acts as a hedge against greater levels of turbulence in global financial markets.
Last year the flagship fund was down 5.6% and up 0.4 percent in 2016. The fund had gained about 17 percent in 2015, benefiting from the flash crash that year.
Still, the real casualties are expected to emerge only with a substantial delay: “Traders who were short volatility just had to puke,” according to Tobias Hekster, co-CIO at True Partner Advisor. “And our expectation is we’re not done yet.”
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