Trading in the VelocityShares product was halted Tuesday morning in Europe. Credit Suisse Group AG , which created the instrument in 2010, said it would liquidate the product on Feb. 21.
Tim Gluck of Mercer Island, Wash., was among the individual investors trading the ProShares short-volatility ETF over the past year. Last summer, Mr. Gluck became nervous when he saw volumes surge as more investors flocked to the trade, under the assumption that volatility would stay under wraps. He started shorting the ETF, or betting on its decline. As a result, he has scored about $20,000 in profit as the ETF collapsed in the past few days, offsetting losses to his stock portfolio from the market’s tumble. “Money kept pouring into the ETF but it’s a dangerous product that most people didn’t understand,” he said. Some large hedge funds may have exited the short-volatility trade in the nick of time. Two Sigma Investments LLC, a quant firm that manages over $50 billion, had been a major holder of the Velocity Shares product but didn’t post losses from the investment on Monday, according to a person familiar with the matter. Even though stocks recovered Tuesday, traders say more volatility could be ahead as some quantitative-oriented investors adjust their portfolios. Commodity Trading Advisors, or CTAs, which manage $305 billion, according to HFR Inc., and borrow additional money to expand their bets, are hedge funds that invest in various global markets using computerized models. Many chase trends, earning them a nickname of “trend followers.” Most CTAs have been bullish on stocks, oil and other investments in recent months, building stock positions to near-record levels, traders say. A few down days in the market generally won’t spur changes in their models. But the models generally use the markets’ volatility as a key input, according to Raphaël Gelrubin, founding partner of KeyQuant, a $400 million fund in Paris. As such, many CTAs will be forced to trim holdings of stocks, bonds and other investments.
—Mike Bird contributed to this article. Write to Gregory Zuckerman at [email protected] and Laurence Fletcher at [email protected] Corrections & Amplifications Transtrend has lost 3.5% in 2018. An earlier version of this article incorrectly stated the firm was down 7.5% so far this year. (Feb. 7, 2018) Appeared in the February 7, 2018, print edition as 'Stock Swings Sink Popular Trade.' Volatility Is Back. Scarred ETF Investors Aren’t Exchange-traded products that profit from rising volatility have fallen out of favor, despite gains
A trader working in the Cboe Volatility Index, or VIX, pit on the floor of the Cboe Global Markets exchange in Chicago in February. The VIX typically rises when stocks fall, making it an attractive form of insurance. PHOTO: DANIEL ACKER/BLOOMBERG NEWS By Asjylyn Loder April 10, 2018 7:21 a.m. ET 4 COMMENTS Exchange-traded products that enable investors to profit from wild price swings in stocks are enjoying big gains this year. But retail