When Volatility Markets Changed

Published on
June 25th, 2019
Duration
62 minutes

When Volatility Markets Changed

The Interview ·
Featuring Benn Eifert

Published on: June 25th, 2019 • Duration: 62 minutes

Benn Eifert, CIO of QVR Advisors, sits down with Michael Green of Thiel Macro to reveal the massive psychological change that took place in the volatility markets in 2012. After the 2008 financial crisis, tail-risk hedge funds saw a large influx of capital - in 2012 that capital allocation flipped. Eifert explains how short-volatility strategies started exploiting volatility risk-premium to enhance portfolio yield and what that shift means for the future of volatility markets. Filmed on May 22, 2019 at the EQDerivatives conference in Las Vegas.

Comments

Transcript

  • ET
    Eduard T.
    28 June 2019 @ 00:58
    Great interview, thanks!
  • BB
    Brian B.
    27 June 2019 @ 13:52
    Related article on FT: "Korea’s yield-seeking pensioners are shaking world markets" https://on.ft.com/2IFVsvf
  • BB
    Brian B.
    27 June 2019 @ 13:48
    The Michael Green interviews are the *best* content on Real Vision - unique and interesting content not found elsewhere. Thank You!
  • SA
    Stephen A.
    27 June 2019 @ 08:57
    About 2017, the VIX futures curve was steep because the investment community was panicked about Trump and his coming tariffs which kept the back part of the curve at high levels (as Eifert says that is where institutions hedge). At the same time, realized vol was at historic lows as institutions were not going to sell stocks ahead of tax reform. So realized vol was pushing expected vol (VIX) down and you had a record contango (spread between 2nd VIX future and 1st future) and roll yield (spread between 1st future and spot VIX) that year. That meant that something like XIV that makes money on those spreads would be raking it in big time. XIV was up like 70-80% through June in 2017. Once tax reform got the green light in September, institutions stopped hedging and the VIX futures curve collapsed to its lowest levels in history. The curve was flat (meaning there is no automatic gain) and very low (high mean reversion risk). The contango trade was bled dry so the right trade at that point was to be long vol and bet on mean reversion move after tax cut was signed. I run a retail VIX advisory service (vixcontango.com) and my subscriptions doubled up in the middle of 2017 - there was so much interest in the short vol trade. Who doesn't want to make 10-20% per month? We will probably never see again such a weird combination of institutional panic which resulted in high levels of hedging and institutional euphoria (because of future tax cuts) which resulted in record low realized volatility. The short vol trade of 2017 is a unique moment in investment history.
  • SA
    Stephen A.
    27 June 2019 @ 08:08
    "People remembered how bad it was to be short convexity"... I can guarantee you 95% of the finance community does not know what "convexity" means. The word "convexity" didn't become part of trader lexicon until Trump won the election and 2017 put short vol on the map. The other part is these "overlays" they keep talking about - these are option protection strategies on top of basic equity holdings - these people pay option premium through the nose on this. So I don't know how people that pay option premium all day cast themselves as "short vol" heroes. Go figure. Love Mike Green who is an exceptional articulator of very complex concepts, but his guests need to tone down the jargon. I can't stand jargon from people who can't even get the basics right. Also this guy seems to think hedging started in 2010. I know Mr. Eifert is a millenial and probably would be shocked to find out that option trading did exist prior to his professional career. In fact, alpha and beta "overlays" were done before 2008 and most of the hedge fund riches out there were both long stocks and long volatility and making money hand over fist in both from the mid-90s to the mid-00s because both the core position and the overlay made massive amounts of money. Post-crisis traders can only wish to be so lucky. The only thing that was different after 2008 is that the FED went all-in to suppress vol after the 2008 debacle (and for good reason) which made short vol a big winner in the last few years and has really decimated the hedge fund industry.
    • LC
      Louis C.
      27 June 2019 @ 12:06
      Option overlays are not necessarily option protection strategies: cf. call overwriting. Criticizing is better if it is balanced and correct. And yes, most people involved in Finance - that I know of -,know what comvexity means: true though, most of them were working in Finance at the time of Lehman collapse
    • DR
      Daniel R.
      1 July 2019 @ 21:25
      Overlays are by and large NOT protection strategies these days. You are 100% wrong on this point.
  • Hv
    Hannah v.
    27 June 2019 @ 00:55
    Michael Green: consistently the best listener, crypt-pinning questioner and sexiest finance-beast out there. Love his interviews and style. Thanks for showcasing his intelligence and knowledge, RV. Well done.
  • RE
    Richard E. | Contributor
    26 June 2019 @ 18:48
    Well done and a great topic to cover. Kudos
  • LC
    Louis C.
    25 June 2019 @ 23:44
    MG high quality as usual. One comment: at some point, to emphasize on the dumb systematic vol selling story telling, BE says people were selling SPX implied vol below realized, back in Jan18 b4 the Feb18 VIX blowup. That's incorrect: SPX realized vol was below 8 for most of Jan18. Vix fut (front) traded above 10 during that period. Although at historical low realized/implied, implied was above realized, and therefore long vol gamma hedging was negative PnL back then (not saying it s smart to sell vol at 10 though, however low realized may be). => As opposed to impression given by the short vol critics, there is rarely easy no brainer positive carry coupled with positive risk free lunches in market
  • JH
    Jesse H.
    25 June 2019 @ 23:19
    Superb. Thanks guys. Amazed at how much of this I actually understood, as an engineer with a strong interest in finance but no formal training.
    • JH
      Jesse H.
      26 June 2019 @ 20:10
      Options to me are kind of like organic chemistry — awesome and engrossing to those who take the time to dive deep and understand them, but relatively inaccessible and a source of frustration for those who don’t.
  • MC
    Minum C.
    25 June 2019 @ 20:23
    Awesome stuff.
  • DS
    David S.
    25 June 2019 @ 20:22
    Great as always. I love these in depth, deep water options interviews. It shows that this is for professionals only and maybe not even them. Thanks. DLS
  • LC
    Laurent C.
    25 June 2019 @ 19:55
    Michael G. is by far (with Raoul) the best interviewer on RV... I would really love to see him even more often. Great series by the way and right level and depth of discussions. one small request: would it be possible to cover the energy (oil, gas, coal, copper, EUA, power) and precious metal vol markets as well? thanks cheers Laurent
  • WB
    Wes B.
    25 June 2019 @ 18:02
    As a former market maker who stood in the pits of the CBOE and saw this flow I found this fantastic. Benn is spot on. The systematic vol selling in the near contracts buries market makers with long options. I do remember a time when we relied on this flow to get options back, but then as the business grew it became very difficult to trade with as a market maker because there was no longer any balance of buyers and sellers in the market. I get really annoyed when you see option gurus on TV or twitter always assume that big prints of options are bought by the public. In my experience, way more institutional option flow is sold to open than people realize.
  • OC
    Otto C.
    25 June 2019 @ 16:46
    Great interview, these are the topics that are complex but extremely important to be aware of. Keep up the excellent work!!!
  • PC
    Philip C.
    25 June 2019 @ 12:41
    Berkshire Hathaway
    • MC
      Minum C.
      25 June 2019 @ 20:22
      That would be like one of those Scooby Doo episodes when the mask is taken off at the end and everyone finds out it was the meddling kids.
    • LC
      Louis C.
      25 June 2019 @ 20:28
      Guess or Affirmation? Plausible. If true would be quite funny... 15y ago they were the only world sellers of long dated 10y Index Put options, now they would be the whale downside 1m short dated put sellers?? From one extreme to the other
    • RE
      Richard E. | Contributor
      26 June 2019 @ 18:49
      Berkshire was definitely a seller of 10 year worst of puts before the financial crisis because they knew of the dislocation in the volatility market created by variable annuities. So Uncle Warren is not afraid of the financial weapons of mass destruction he tells everyone to avoid
  • AB
    Andrew B.
    25 June 2019 @ 10:32
    Great interview. Plenty of pausing to catch the nuances, but well done Michael on asking the right questions. Do you look in the mirror and see the "Put Bomber"........???
  • PJ
    Peter J.
    25 June 2019 @ 10:24
    I like Mike Green and think he is one of the best interviewers around. I got the gist of about 40% of what he and Benn were talking about, but the rest went way over my head. It would be really good if Mike or someone else at RVTV could do a layman's synopsis video to this discussion and flesh out the risks and possible consequences of what they were talking about so me and possibly others in the same boat could gain a better understanding.
    • MK
      Michael K.
      25 June 2019 @ 11:00
      A reasonable request. Just being mindful that a variety of content should be available including professional depth. I’d suggest a few obvious books, none other than Taleb’s dynamic hedging. More easy to understand is euan Sinclair volatility trading. And should be around for free, trading volatility from Colin Bennett.
    • MG
      Michael G. | Contributor
      25 June 2019 @ 18:03
      Peter and Michael, thanks for the comments. These are high level discussions that elude many professional investors, but are increasingly the dominant features of the market as money flows into passive strategies and interest rates fall to inadequate levels. For most there is no practical method to implement the strategies required to profit from the risks created by crowding and unregulated insurance underwriting (vol selling). The best I can offer is to help people become aware of the changes and the risks. The “market” (equities, rates, credit, Fox, commodities, etc) is largely unrecognizable from when I got my start nearly 30 years ago, but MOST continue to ascribe the narrative of prior periods to today. In my view this is an error that will have societal-level ramifications. As far as a tutorial, the key risks basically boil down to two types: 1) “free rider” strategies like passive that improperly model the impact of their participation (and end up influencing the market they participate in as they grow in scale — basically a “tragedy of the commons” variant) and 2) unregulated insurance selling strategies that ostensibly offer “yield enhancement” by underwriting heretofore unobserved tail outcomes (eg XIV).
    • PJ
      Peter J.
      26 June 2019 @ 08:21
      Mike K, I'll take a look at the books you have mentioned. Mike G, your comments add some additional light to the interview. I'll re-listen after I've done some background reading as I think it may help. Thanks to you both.
    • SM
      Sean M.
      26 June 2019 @ 18:04
      If you listen to Jeremy Newsome's Tesla trade on a recent episode it is much smaller but somewhat like the put bomber's trade and explains the risk and the hedging. Not nearly as complex but a starting point.
  • CN
    Charles N.
    25 June 2019 @ 07:53
    Can every month be Vol Month?
    • WY
      Will Y.
      26 June 2019 @ 02:25
      yes please RV
  • HK
    H K.
    25 June 2019 @ 07:10
    Matt Green. Brilliant as usual and interjects just the right amount at the right time. Very insightful interviewee as well, of course.