Hedge Trim
By John Newsome on 21st February 2018

Investors will be well aware that world stock markets have been rattled over the past couple of weeks. Chatter about a mini crash came naturally after Wall Street shed 6% in a single session. Various culprits were rounded up; rising U.S. Treasury bond yields, simmering inflation, Oxfam, the reduction of central bank stimulus and the shorting of volatility.

The latter deserves some explanation. Shorting involves selling something you don’t own in the hope of closing the position out in the future at a lower value. It is also possible to bet on how volatile markets might be via Exchange Traded Funds (ETFs) and Exchange Traded Notes (ETNs). Volatility has been at all time lows over the past couple of years, so those expecting such conditions to continue, bought ETFs and ETNs that sold futures contracts. It’s a bit like thinking the weather will be sunny, so you sell investors the right to buy umbrellas. What could possibly go wrong?

In short, it had become what is known as a crowded trade which means that so much money was taking one side of the bet that the merest hint of conditions changing led to the underlying index registering the largest percentage change in its history. Credit Suisse, the investment bank, said it would begin early redemption of a product that, overnight, lost 96% of its value. After almost liquidating itself within hours, you kind of wonder why they’re bothering at all.

The Japanese bank, Nomura, though, offered a little more entertainment. It announced closure of a similar vehicle with the statement “we apologise from the bottom of our hearts for causing great inconvenience for the holders”. I really should, by now, know better than to read statements by investment banks while drinking coffee but ‘Hurricane Kenco’ took a bit of cleaning up.

Credit Suisse said the closure of its fund would have no material impact on the group. While the bank was listed as the largest holder, it was reported that these holdings were held entirely on behalf of clients and the vast majority of them were hedge funds. Now, I’m not a religious man; I struggle with the concept of faith although I wish it were not the case. However, after reading that I immediately became aware of a warm fuzzy feeling that tells me, there is, almost certainly, a god, after all.

John Newsome can be contacted on:
01423 705123