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A quick thing on the long-awaited, entirely predictable ‘Volpocalypse’

A quick thing on the long-awaited, entirely predictable ‘Volpocalypse’

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How many warnings did buyers of XIV, the volatility-linked exchange-traded note (ETN) note that went bust last week get? A lot.

First there was the prospectus itself, which spelled out wipe-out risk fairly clearly. Then, there were multiple articles from multiple financial news and analysis outlets, myself included.

There were also tweets!

Like, lots of them!

The below tweet was from Jan. 31st — about five days before the actual blow-up! The only response I got to this at the time was from a guy complaining that he couldn’t see the x-axis so the chart was meaningless. That wasn’t the point! And if you don’t understand what a change in the shape of the VIX futures curve might mean for volatility-linked products, then you probably shouldn’t be trading them!

I tried to sum up just how telegraphed this was in a short note for our markets morning newsletter, which you can sign up for (for free) here.

I don’t mean this to sound callous to those who lost their shirts on this product, but neither do I want this to be spun as a failure on the part of forecasters and journalists etc. This was a well-telegraphed event that people saw a mile coming. That doesn’t mean there wasn’t failure somewhere. The fact that some retail investors seem to have been taken completely by surprise in the recent turn of events suggests they probably shouldn’t have been in these products in the first place. Whether that’s a failure on the part of the regulator, the ETN-issuer, the brokerages that enabled trading in the products, or some other party, I leave that to others to decide.

The benchmark index providers who rule the world

The benchmark index providers who rule the world

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I find the intellectual questions thrown up by benchmark indices absolutely fascinating. Talk to the providers about what it is they do exactly and most of them will say they hold a mirror up to the investable world as it exists, while simultaneously acknowledging that their decisions can end up reshaping just what that reflection looks like. What everyone can agree on: their role in a market increasingly dominated by passive investing is growing.

So here are 2,000 words or so on the index providers who rule the world … as well as the people who want to unseat them.

Benchmark indexes trace their history to the late 1800s, when Charles Dow, co-founder of Dow Jones & Co., created the first as a way to gauge the general direction of the market (and to sell newspapers). Today the number of benchmarks outnumbers that of individual stocks. “The problem is that a lot of investors assume that the benchmarks are almost God-given and that they’re ­problem-free. Most of the time they’re not,” says Mohamed ­El-Erian, chief economic adviser at Allianz SE and a Bloomberg View contributor. “It’s a crucial issue. And it’s becoming even more important as more and more people migrate to passive products.”

Index Providers Rule the World—For Now, at Least – Bloomberg Markets Magazine