This wild and crazy month of February 2018 is finally in the books. Our Total Portfolio Solution return for the month was basically flat, but I suspect for most people our emotions certainly weren’t flat. It’s one of those months that will likely be remembered and referenced for many years to come.
It’s not that the rapid -11% decline in the S&P 500 was that abnormal, it wasn’t. The stock market can correct like that at any time and often does, even within the context of a strong bull market. What made it so historic was the fact that because we are coming off the longest period of low volatility in history, that sudden drop in stocks had an amplified effect on volatility and we saw a 115% single day VIX index spike.
The VIX futures market which the various volatility ETPs derive their prices on just couldn’t keep up. There wasn’t enough liquidity to absorb the end of day rebalancing they are required to do and as a result they decoupled from historical beta ranges and spiraled out of control. Our beloved XIV was lost completely, and while SVXY and VMIN survived they will never be quite the same again.
This is a massive oversimplification here but essentially the products outgrew the market they are based on. Years ago when they were launched I don’t think many people ever really believed they would amass the net assets they did by the end of 2017. It’s not that it’s a crowded trade as you often hear, but it is a massively popular trade and the futures market couldn’t absorb the demand.
Some changes to these products have already taken place and it’s certainly possible there are more coming on the horizon. Regulators are still trying to clean up some of the mess and will now attempt to find ways to ensure healthier markets going forward. We have no control over their end of it so all we can do is be as informed as possible and continue to make good decisions.
It was quite a busy month for me so please let me take this opportunity to thank everybody for their patience this month. I know some of your questions took a little longer than usual for me to respond to, and I’m sure there were a few that just got lost in the ether.
* If you asked a question and have yet to hear back from me, please ask it again. My workload is basically back to normal now and I promise I won’t miss it a 2nd time. Apologies
It would be nice if the markets calmed down a little bit here but whatever is on the horizon we’ll be ready for it. Bring it on March!
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