By Patrick Commins
The rapid unwinding of complacent markets may have claimed its first victim, with a Wall Street exchange-traded fund, which profits from falling volatility, crashed in after-hours trading, triggering the closure of a related Tokyo-listed product.
The $US2 billion VelocityShares Daily Inverse VIX short-term exchange-traded note, trading in New York under the ticker XIV, was hammered 14 per cent overnight as the volatility index, or VIX, spiked amid the worst fall in US stocks since August 2011.
But in after-hours trading, the fund's price crashed from $US99 at the close to $US20, just shy of 80 per cent, Simon Ho of Triple3 Partners told Fairfax Media.
That had analysts wondering whether investors had grown nervous the fund would trigger a clause under which it can wind up in the event of losses in excess of 80 per cent.
"It's hard to say whether [traders] at the end of the day knew that it was going to be in breach of that rule," said Mr Ho, who is an expert in volatility and manages the Volatility Advantage Fund.
Simon Ho of Triple 3 Partners: "To date it's only been a three-day sell-off, but it's been powerful enough trigger this kind of response."Credit: Daniel Munoz
In a strong sign of things to come, Nomura Europe Finance on Monday announced that its Tokyo-listed exchange-traded inverse VIX product "will be redeemed early, after a condition for early redemption was triggered due to movements in the underlying index".
The XIV fund has proved extremely popular among investors who have bet the extended period of calm on markets would lead to continuing low and falling volatility.
Last year, the fund made a 180 per cent return. But many experts, including Mr Ho, have been warning of the sudden and devastating effect a return to more normal levels of volatility would have on some of these products.
"To date it's only been a three-day sell-off, but it's been powerful enough trigger this kind of response."