$VXX goes down 80 percent of time
"Everyone knows" that US residential real estate is a bad investment, with the Case Shiller Home Price Index having dropped by about 32 per cent since its 2005 peak. At the end of last week, the iPath S&P 500 Vix Short Term Futures Exchange Traded Note had lost that much in one month. Not seven years. One month. Over the previous six months, the vehicle had lost more than 69 per cent of its value. The managers didn't do anything other than rigorously follow their charter, and their strategy has been fully disclosed, along with the trading history.
The reaction of some investors to this record is interesting: they have been doubling down. There has been a spurt of option buying on the ProShares Ultra Vix Short Term Futures Fund, which aims for twice the daily return for the Short Term Vix Futures Index.
Vix futures or options, you are not actually buying "volatility". Those products are based on the prices of forward start variance swaps. If you don't know what that means, don't buy Vix products.
The hedging activities generated by the Vix family may have had some effects on the S&P 500 Index. Howard Simons, of Chicago-area-based Arbor Research & Trading, says that on big down days the hedging requirements of those selling volatility products such as the Vix futures "requires more selling (in the S&P 500) in a cycle, reminiscent of the portfolio insurance made infamous in the 1987 crash". But if the market makers' hedging can exacerbate a sharp daily decline, it also leads to much more rapid recoveries in following days, as the price of implied volatility jumps. Over longer periods of time, Mr Simons, an acid Vix sceptic, believes that "the tail [the Vix] has wagged the dog [the S&P 500] and has compressed what used to be normal higher levels of volatility into a mix of a few bad days and a large number of quiet days".