Persistence paid off. The hedge fund manager who became known as 50 cent because of the cost of the derivatives contracts to protect against market volatility, saw his position pay off during the recent stock market correction.
Estimated to have spent $200m on the contracts since the start of 2017, most of them expired worthless as markets continued to climb during last year.
While most City analysts were talking about "toppy valuations" and a long overdue correction, 50 cent - a manager at investment company Ruffer - kept buying the contracts as a hedge against his portfolio losing value in a downturn.
The Financial Times reported, quoting traders and bankers familiar with Ruffer’s deals, that as stock markets fell last week and the Vix index rose - 50 cent's trades on Vix volatility rising may have paid off as much as $400m mark-to-market, giving the manager a $200m net profit.
The CBOE Vix is an index that measures implied volatility on the S&P 500 stock index in the US. Colloquially called Wall Street’s ‘fear gauge’, the index rises during stock sell-offs and remains at low levels when stocks are stable.
Seeds of next crisis
Ruffer remained in the spotlight on Tuesday after managers Hamish Baillie, Steve Russell and Duncan MacInnes warned in a trading note that the seeds of the next financial crisis would likely lie within the fund management industry.
The managers had specific concerns about those funds targeting low volatility. An estimated $1tn of assets - mainly obscure derivatives targeting low volatility on the Vix index - are held in such funds, they said.
The managers continued: "This self-feeding mechanism is inherently unstable and if events cause a reversal (ie, a spike in volatility) the result could be a sharp sell-off in asset markets. This process is exacerbated by the rise of computer-driven trading models and passive investment, both of which are strictly rule-based and unthinking in execution."
Vix trades gone wrong
As examples, assets in Credit Suisse's VelocityShares Daily Inverse VIX Short-Term ETN were worth around $2bn in late January, but are now down 94.5% year to date. ProShares Short VIX Short-Term Futures ETF is down 90% so far this year.