Last week, whereas numerous others have been getting annihilated, Lincoln Edwards noticed the hundreds of thousands of dollars he manages for a small Austin, Texas-based hedge fund double within the span of simply 15 minutes, because of a depraved spike in volatility that rattled the inventory market and blew up one in every of Wall Street’s hottest — and worthwhile — trades.
A 6,000% return on a single place will do this for you.
“We basically bought what amounts to insurance against a hurricane destroying our house,” Edwards stated in an interview on Wednesday. “We couldn’t have predicted when this storm would hit, but if we hadn’t protected ourselves, we would have been completely knocked out.”
There have been loads of others who, certainly, have been utterly knocked out.
After all, the Dow Jones Industrial Average
had registered its largest drop in a number of years, which triggered a swift surge within the “fear gauge”
and gutted these betting closely on the market serenity to proceed.
One retail dealer shared his story of dropping $four million in a single day when the VelocityShares Daily Inverse VIX Short Term ETN
misplaced almost all its worth. An identical destiny would have befallen Edwards had he not purchased places on the ProShares Short VIX Short-Term futures ETF
an alternative choice to the XIV.
“It was mostly just part of our risk management process,” he defined. “Always cap the downside.”
‘People were laughing at us, saying this could never happen, this should never happen.’
Edwards, in fact, wasn’t the one lucky options-buyer to ring up income from the chaos. Another story of a VIX-related windfall final week got here out of Denver, the place merchants at a hedge fund turned a $200,000 guess into a $17.5-million payday.
“People were laughing at us, saying this could never happen, this should never happen,” Justin Borus, the 41-year-old founder and supervisor at Ibex Investors, told Bloomberg last week. “We saw people pricing this as a 1-in-5,000 event, but it was more like a one-in-five-year event.”
Also learn: The trade that made $400M on the volatility spike.
As for Edwards, his epic trade was extra than simply a lottery ticket.
Like so many others gamers within the volatility area, he had capitalized on the inventory market’s historic calm over the previous yr, together with his Houndstooth Capital Management shoppers having fun with a powerful 104% return in 2017. While that type of efficiency is implausible for any fund, it will have been a lot better for Houndstooth if it wasn’t for the price of holding these protections in place.
“We never would have put that XIV trade on without protection,” he stated, even when it meant lacking out on a few of the upside different volatility merchants did. But no one’s complaining about that now.
What’s subsequent? Edwards is presently in wait-and-see mode.
“How the dust settles is unclear,” he stated. “Either the short volatility crowd could get significantly thinned out or we could see people double down.”
In the meantime, Edwards has shifted his shoppers into money till he figures out his subsequent transfer. “No shame in being cautious in this ambiguous market,” he stated.