Login

First Victim Announced: A $300M VIX Fund Goes Poof

Congratulations to Nomura Europe Finance for being first across the finish line in the VIX self-destruction contest.

The Cboe Volatility Index’s biggest rally ever is raising thorny questions about the future of exchange-traded products tied to the gauge.

An ETP meant to mirror moves in the front of the VIX’s futures curve plunged more than 75 percent in after-hours trading following an 80 percent spike in contracts that comprise its underlying index during the trading day, potentially putting in play triggers that would enable the fund’s owners to liquidate it to avoid losses.

The surge in volatility has already claimed one victim: Nomura Europe Finance announced the early redemption of its Next Notes S&P 500 VIX Short-Term Futures Inverse Daily Excess Return Index ETN, which had 32.4 billion yen (approximately $300 million) in assets.

Trading was halted in VelocityShares Daily Inverse VIX Short-Term ETN, which trades under XIV, according to a market statement Tuesday.

“If they lose more than 80 percent of their value, the sponsor has the right to liquidate and they should, or they take on the risk. Thus if Bloomberg’s indicative value is correct, they are due to be liquidated,” Michael O’Rourke, chief market strategist at JonesTrading, said.

The fund, the VelocityShares Daily Inverse VIX Short-Term ETN, has been wildly popular in the past year as volatility on American equity markets sank to historic lows, delivering an eye-popping return of more than 187 percent last year. It pulled in nearly $1 billion in just the first five weeks of this year, while the VelocityShares Daily Inverse VIX Short-Term ETN (ticker XIV) has added almost $750 million over the same time frame.

The S&P futures put in a wild ride this evening with multiple swings in both directions. The S&P is up 100 points from the low, in the green by 10 points as I type at 5:00 AM Central. The VIX is near 44.

Expect more announcements soon.

Mike "Mish" Shedlock

IMHO, I do not think any government agency or government sponsored agency will take action to state or imply a "break the buck PUT" exists. Recall, brokerage accounts recently were required to move clients in to settlement/sweep accounts that meet certain criteria. I believe, these accounts are better positioned (read: hold more treasury and safer short term debt) than accounts that did not qualify as settlement/sweep accounts (read: reaching for yield). We will see how it plays out ST Intermediate Term and LT. ONLY Mr. Market knows. I am over 75% safe CASH IMO.

FDIC has since backed off the MM "Put." However, leverage is even much more of a problem today than it was on 09. As for risk off, I agree. Reshuffled the portfolio in January to reflect that posture. Aside, my guess is, holding some cash in Treasury Direct might be a safer alternative to bank deposits. These crises never repeat exactly, so "Past Performance isn't indicative of Future Returns." ;-) Cheers.

Bank deposits are covered up to 250k. You may want to keep funds in different banks in case they close the bank. There is no rule stating you can get your money immediately under the FDIC guarantees. Also you are on your own with money markets there is no guarantee on those.

For everything that isn't covered by mastercard, there is always the Bank of Sealy, I guess ;-)

has anyone here tried to read how the xiv works trades and is valued.? I stopped reading the explanation after a minute, it is a bit to0 complicated to take the time and understand it.

In November 2014, the G20 changed the rules for depositors. That is called a Big Red Flag. In 2005, congress changed the bankruptcy rules. That was a Big Red Flag. Subsequently, the housing market collapsed. This time, subsequently,... Remember what happened in Cyprus. The FDIC has how much money to cover how much in deposits? That plus a line of credit. We don't know what the extreme condition will be or what extreme measures may occur in the next crisis.

NOT a big Mr. Wonderful fan, but just said on CNBC "if you don't understand what you own you deserve to go to zero". ---So TRUE, Joe6Pack IMHO has no idea what they own or the level of risk they are unknowingly accepting.

“This is a listed product, and we believe it can be bought by both individual and institutional investors,” Nomura said in an emailed statement. It declined to comment on any positions it took in the product

Stories