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The backstory as I see it is.....
There are two things:
1) Being â€ślongâ€ť volatility.
2) Being â€śshortâ€ť volatility.
Being â€ślongâ€ť volatility might be beneficial in that volatility often goes up when the market goes down. Being â€ślongâ€ť volatility MIGHT thus sometimes be a decent hedge against declining stocks.
The stock market was/is high (in many ways).
And volatility was at an all time low (several weeks ago).
The problem with being â€ślongâ€ť volatility is with the complexity of the instruments (depreciating derivatives) and leverage.
Being â€ślong volatilityâ€ť MIGHT sometimes makes sense.
But it is highly complex and highly problematic.
I believe that this is what 50 cents (or his investment team) is supposed to have done (successfully).
2) The implosion that the article discusses is associated with being â€śshortâ€ť volatility.
This has the same problem as being â€ślongâ€ť volatility- in that you are investing in depreciating derivatives that use leverage.
But being â€śshortâ€ť does NOT have hedge justification that being â€ślongâ€ť might have.
In effect you are betting that volatility (already at record lows) is going to get lower quickly.
Being â€śshortâ€ť volatility in late January would argue that- 1) Markets would be even less volatile (markets were at a record low volatility), or 2) Markets are likely to go up more than expected.
Basically being â€śshortâ€ť volatility is a ridiculously complex investment that. The strategy probably only make sense to a few very specific types of institutional traders.
And would almost never make sense for a retail investor.
But it was supposedly retail investors that were invested in this inverse volatility thing XIV (backwards of VIX- the volatility index).
Which begs the questions...
Who- Kramer (and others) says it was arrogant yahoos
Why - these yahoos believed themselves to be geniusâ€™ but ironically didnâ€™t understand what they were doing .
The Kramer explanation seems likely to me.
But I didnâ€™t investigate the Kramer thesis.