Saturday, May 20, 2017

LTCM x1000: The True Cost of 0% Poverty Capital

ZH: Long Brazil ETF Loses Record -48% In One Day
Thanks to leveraged ETFs, the 1987 crash has become child’s play. For a number of these ETFs, a 20% decline has become a non-event...Before this week, the 3x short Financials ETF (FAZ) had held the record for largest one-day loss, at 45.1% (on March 23, 2009). The record stood for over 8 years. Who will be the first to lose 50% in a single day? The casino is open – place your bets.

Ok, let me begin with the fact that the above list does NOT include the flash crashes, which took down many 1x leveraged ETFs by 40+%, including the equal weight S&P 500, because by the end of the day, these had recovered. 

My opinion is that this week set up the largest smash crash in history...

While the unprecedented market swings during the financial crisis imposed massive drawdowns on short volatility strategies, handsome profits have since been generated betting against a repeat of that market chaos. Over long periods of time, there are few trades that hold up  as well as selling equity volatility. Faced with the daunting task of achieving 8 percent return targets, many pension funds have “bought the back-test” and are actively generating returns through short option strategies.

While Mother Nature dictates the timing and severity of the next hurricane, the financial market equivalent may arise endogenously, propelled by the forceful unwind of trades that enjoyed too much success for too long. Winning trades attract money, and as capital flows in to them, they become increasingly crowded. In markets, positioning matters. 

"Pile in, this trade never loses money"