Tag Archives: ideas

Is UVXY Shutting Down Due To New SEC Rules?

Summary A look at newly proposed SEC rules. How they could affect ProShares products. A look at the current volatility landscape. Before we get started I wanted to highlight my last article: Neuroeconomics and Volatility . I really enjoyed writing this piece and it is a very different take on your normal volatility reading. Feel free to share this unique piece. A reader of mine recently alerted me to an article that claimed many leveraged ETFs would need to close due to a newly proposed Securities and Exchange Commission (SEC) rule. This article will serve to properly inform readers on how this may affect the ProShares Ultra VIX Short-Term Futures (NYSEARCA: UVXY ). Article In reference to the original article that made this claim, I would like to focus for a minute on the strategy they are talking about. This strategy is close to the ones I have shared with you here on Seeking Alpha in regards to shorting volatility and taking advantage of contango and the effects of leverage. David Miller’s Catalyst Macro Strategy Fund uses a bread basket of many leveraged ETFs to short and take advantage of the decay of the underlying assets over time. He specifically mentions UVXY as one of the funds holdings and maintains a net short position in the volatility ETF. I encourage you to read the article as it presents other ETFs and strategies that we have not discussed in relation to volatility and leveraged ETF investing in general. SEC Comments On 12/11/2015 the SEC proposed new derivatives rules for registered funds and business development companies. You can read the full release here . The bottom line of the proposal, in relation to ETFs, is to prevent funds from liquidating due to extreme moves in their underlying indexes. It appears that this rule may put an end to my dream for a leveraged inverse volatility fund. ProShares Comments According to ProShares (view release here ), they are confident that this proposal will not impact their ability to offer the current 2x inverse and 2x ETF and mutual funds which include UVXY. However, it may impact their ability to operate 3x leverage funds. These funds mainly track broader market indexes and sectors. You can view a list of those funds here . My take I wouldn’t be concerned with the talk about UVXY shutting down and I also wouldn’t let it affected your trading objectives. The only affect this has on my current objectives would be to switch to the iPath S&P 500 VIX ST Futures ETN (NYSEARCA: VXX ) options if I am looking at more than a year until expiration, just in case. Any decision the SEC makes will be phased in over time and this proposed rule must still be approved by the Commission and will then be subject to a 90 day comment period. Seeking Alpha is a great place to get up to date information on these types of changes and any new information will surely be covered by myself or other fine contributors. Current Volatility Futures Backwardation has once again appeared. See below: (click to enlarge) Current Futures: (click to enlarge) Conclusion As we move into 2016 I am looking forward to the change in pace of volatility spikes. Hopefully we will move toward a trading environment where we see backwardation events on average every 2-3 months. I am not currently shopping for a large short volatility position unless market conditions deteriorate a little further. I may take small short positions here and there with very short-term trading objectives. Coming up you have the start of a Federal Reserve meeting that wraps up mid-week with a widely held notion that rates will be raised for the first time since 2006. The government shutdown is still on for the end of the week with a consensus that a deal will be struck before then. It doesn’t appear that UVXY is shutting down anytime soon due to the proposed SEC requirements. I wouldn’t panic and recommend you wait until more information becomes available. Have a great end to 2015 and thank you very much for reading.

Hedge Fund Conversations: Dane Capital On Investment Strategy, Finding New Ideas, And More (Video)

SA Author Dane Capital Management discusses investment strategy and finding new ideas with Hedge Fund Conversations. Among topics discussed are semiconductor consolidation, shorting strategies, and informational edges. The interview also goes deep on Dane Capital’s thesis for Lindblad Expeditions. ( Editors’ Note: This interview is republished with the permission of Hedge Fund Conversations . It features an interview with Seeking Alpha Contributor Dane Capital Management, LLC, a.k.a. Eric Gomberg.)

Has Risk Parity Jumped The Shark? Asness Says No

By DailyAlts Staff According to AQR’s Cliff Asness, anyone who thinks risk parity caused the massive selloff in August has gone “all tinfoil-hat”. A better argument against risk parity, Mr. Asness concedes, is the fact that it has underperformed over the past several years. But is this underperformance a result of the strategy having jumped the proverbial shark ? Or is it simply a bad run to be expected with any strategy? Not surprisingly, Mr. Asness thinks it’s probably the latter, and this is the view he articulates in ” Putting Parity Performance into Perspective ,” the alliterative latest in his Cliff’s Perspectives series of white papers. Risk Parity Basics Mr. Asness takes the first few paragraphs of the paper to refresh readers on the basics of risk parity : “an alternative long-term strategic asset allocation” used to “diversify a more traditional equity-dominated allocation.” Rather than weighting holdings by market cap, risk parity weights them based on their anticipated contribution to overall portfolio risk – and in order to achieve the right mix, this means leverage is used to ramp up low-risk fixed-income holdings. From Cliff’s perspective, risk parity offers a “real but modest long-term edge” over traditional approaches because many investors are “too averse” to applying leverage. Risk parity is often described as an “all-weather” solution, succeeding regardless of the broad market’s ups and downs, and Mr. Asness believes this is true – on average . Unfortunately, we’re not living in “average” times, and as a result, risk parity has underperformed since 2009. Longer-Term Returns It’s impossible to do true risk parity back-testing as far back as 1947, so AQR uses “Simple Risk Parity” for historical analysis. The firm’s findings indicate that the “real but modest long-term edge” that risk parity enjoys over indexing really adds up over time. This is evident in the image below, which charts the cumulative excess return of Simple Risk Parity over the past 68 years: The image above shows Simple Risk Parity’s excess returns above cash. The image below shows its excess return above a “60/40” stock/bond portfolio. This helps put the strategy’s underperformance since 2009 into longer-term historical perspective: Forward Outlook Risk parity is designed to diversify away from equity risk. Instead of adding equities to a portfolio in pursuit of desired returns, risk-parity strategies favor using leverage to ramp up fixed-income risk. With equities outperforming for the past six years, it should be no surprise that risk parity has underperformed. Moreover, risk-parity strategies have also been slammed by the bear market in commodities, whereas “60/40” portfolios don’t even have direct exposure to that asset class. But do these facts mean that risk parity’s happy days are over? Not in Cliff Asness’s view. He suggests that the recent underperformance is of the sort that’s to be expected with long-term strategies, and adds that periods of underperformance are often followed by periods of outperformance. The problem, as he sees it, is that short-term periods of poor performance can feel awfully long – and this can lead to investors bailing at the wrong time. If traders have tactical reasons for wanting to allocate away from risk parity, that’s one thing – but selling because of painful results that should be expected from time to time is unwise, in Asness’s view, even if resisting the urge to do so is “one of the hardest but most important parts” of an investment professional’s job.