We knew coming out of 2012 that those hedge funds that survived would be the ones that hedged the least and therefore endured minimal performance drag caused by the collapse in options volatility. Given that survivor bias, it should come as no shock - yet still is insane to realize, that hedging has become virtually non-existent...
Previously I had shown that the use of index options for hedging had reversed dramatically over the years, culminating in 2012 having the greatest number of days wherein index options were being used for speculation v.s. hedging (i.e. put/call ratio below 1:1).
I also indicated that across a six year period that 15% of the time, the ratio was under 1, therefore 85% of the time, generally these options were on balance being used to hedge. However, in 2012, that ratio of net speculative days had shot up to 30%.
What is that figure so far in 2013? 70%
There have been sixteen trading days so far in 2013, and eleven of them have sported an index put/call ratio below "1". To put this all in perspective, if you follow the link I posted above, during 2007, there were only eleven times this ratio got below "1" in the entire year !!!
January's Put/Call values, so far:
Monthly Trend (since 2006) in P/C ratios below "1" (i.e. #instances/month):
The bottom line is that Central Banks have made it extremely unprofitable to hedge risk, which is essentially the goal of their monetization programs - forced risk taking. This all works well on the way up, so time will tell how it works on the way down.
Back in 1999 at the height of the DotCom boom, there was a saying: "The dumber the money, the bigger the return". That was around the time everyone was questioning Warren Buffett's stodgy investment approach. By 2001 no one was saying that anymore...
The bottom line is that Central Banks have made it extremely unprofitable to hedge risk, which is essentially the goal of their monetization programs - forced risk taking. This all works well on the way up, so time will tell how it works on the way down.
Back in 1999 at the height of the DotCom boom, there was a saying: "The dumber the money, the bigger the return". That was around the time everyone was questioning Warren Buffett's stodgy investment approach. By 2001 no one was saying that anymore...
