Markets

Credit Suisse 'volatility' fund liquidated

Credit Suisse 'volatility' fund liquidated

Credit Suisse's VelocityShares Exchange-Traded Note (XIV) lost more than 80pc of its value following Monday's sell-off.

"The unexpected level of volatility has impaired the trading of the underlying derivatives used by many VIX-related exchange-traded products", said Horizons ETFs Management (Canada) Inc, which halted one of its volatility products and discouraged investors from buying another.

The XIV effectively bets against the widely-followed VIX volatility index, which gauges market fluctuation.

Shorting volatility, or betting on calm stock market conditions, had been one of the most successful trading strategies until Monday, when a massive selloff in USA stocks derailed some popular short volatility exchange traded products (ETPs).

Dusaniwsky noted that with Credit Suisse (CSGN.S) announcing on Tuesday that it would terminate its XIV ETP fund, short sellers will have to buy back shares to cover their short positions on or before February 20th, the last day of trading for the product.

The redemption of the note will likely leave investors with a fraction of their initial investment.




Shorting volatility, or betting on calm stock market conditions, has always been the mainstay of institutional players, but the introduction in recent years of volatility-linked exchange-traded products opened this strategy to retail players.

Credit Suisse's share price has recovered slightly following a statement to the effect that the bank's exposure to the XIV ETN was fully hedged and CS therefore won't be affected by any of the losses relating to it. During regular trading, XIV dropped just 14%.

While these short volatility products are marketed as complex and risky products aimed at sophisticated investors who are cognizant of the risk they are undertaking, the success of these products has reeled in a lot of retail interest. As I wrote a year ago, "An attraction for traders is that, because of the quirks of "rolling" old futures contracts into new ones, inverse notes tend to make money even if the actual VIX doesn't go anywhere".

Some hedge funds were caught holding the bag on this security.

Monday's selloff triggered the termination of Credit Suisse's VelocityShares Daily Inverse VIX Short-Term Exchange-Traded Note (ETN), which tracks financial instruments that effectively bet against a fall in markets.

"That would not surprise me", he said.


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