Chris DeMuth Jr.'s  Instablog

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untrusting investor Comments (9879)
 
Yes, TVIX and other long volatility products are probably the worst "investment" products ever foisted off on ill informed retail investors. The most important question is why are they even allowed to exist or be listed on exchanges. It is precisely these types of securities that are destroying investor confidence in capital markets.
16 Dec 2012, 02:12 PM Reply Like

Eric Peterson Comments (264)
 
Untrusting, I think you are exaggerating a little when you say "It is precisely these types of securities that are destroying investor confidence."

I doubt that more than 1% of all retail investors have ever purchased (or sold) a volatility ETN. I have no data, but the number is probably closer to one in one thousand investors. Such relatively unknown products hardly "destroy investor confidence" in general.

They may be horrible products, but that's not the point I'm arguing.
17 Dec 2012, 09:59 AM Reply Like

Meatball Bob Comments (16)
 
When you look at financial product innovation a bit more broadly, there are a significant number of retail investors getting a rotten deal. Leveraged ETFs across the board all erode their value, not just the volatility products. TVIX just happens to be the worst of the worst.
18 Dec 2012, 01:18 PM Reply Like

Chris DeMuth Jr. Comments (1751)
 
Thanks for the comment; I agree 100%. In fact, we shorted and, when available, used equity derivatives to further express a negative view on, leveraged inverse ETFs for oil, gas, gas equities, gold, silver, and equities while also shorting a leveraged ETF for China and the long bond. Some of our favorite investment ideas have included this theme. For 2011, we shorted ZSL as described here: http://bit.ly/QMvDql. For 2012, we shorted TMF as described here: http://bit.ly/VIfvY1
18 Dec 2012, 01:47 PM Reply Like

jacobtr Comments (82)
 
Chris, I just discovered you and am really enjoying your articles and comments.

I agree 100% on this topic, but what is the point in publishing on this opportunity? Seems better to lay low and keep printing money for ourselves.
10 Jan, 10:36 AM Reply Like

Chris DeMuth Jr. Comments (1751)
 
Thanks for the great question. What initially most surprises me about the history of investing is that investing for value has not destroyed itself. Sure, specific opportunities get gobbled up. But, when I read the first few Buffett Partnership letters about workouts, my reaction was, “well, that ends that!” but such types of opportunities keep arising. I think that there are enduring +EV opportunities that survive both widespread information and judgment required to exploit them.

For example, the VXX and TVIX have dramatically exploitable characteristics for a short to collect a positive expectancy, but what first led me to the topic of volatility itself were utterly price-insensitive investors who laid out their dread of volatility. Over the past four or five years, people, real live adult people free on their own recognizance, told me that they were more sensitive to volatility than expectancy such that I could transact with them and we would both get what we wanted: they would get to avoid the appearance of short-term volatility and I would get their money.

My conclusion is that such non-economic actors are driven by agency problems, embedded games, and narrow mandates. My job in exploiting the situation was to first take on as few of those characteristics as possible and then secondly to provide liquidity when it was demanded. I would be the price-sensitive, time-insensitive side and they would be the price-insensitive, time-sensitive side of these markets. They are not trying to purchase bargains and this is simply a matter of their being really really bad at it. They are trying to do something else. In many cases, they are simply trying to do – and keep – their jobs and such jobs have a lot of arbitrary incentive structures. For evidence, I routinely poll various conventional money managers to ask what percentage of their efforts are due to expectancy and what percentage are due to exogenous factors such as career protection, committee dynamics, rigid hierarchies, and institutional mandates. Most answers range within the mid to high single digits of expected value. I only do the expected value part of investing.
10 Jan, 12:06 PM Reply Like

ETF Edge Comments (88)
 
Nicely written. @Chris I like the way you frame this as an exchange of expectancy vs. volatility. That's not a totally ridiculous proposition as it's the basis for an enormous insurance industry where you take a negative expectancy in return for reduced volatility.

Of course, there's well priced insurance and ripoff insurance. I'd say this is more like "trip cancellation insurance" or Best Buy's extended warranties. Clearly negative expectancy, and not protecting against financial ruin like auto liability or health insurance does.

Maybe these products have really created a marketplace exchange for expected return vs. risk. I know which end I'll be on
10 May, 02:28 PM Reply Like

Chris DeMuth Jr. Comments (1751)
 
Me, too!
10 May, 02:42 PM Reply Like