VIX ETP Performance in 2014

•January 5, 2015 • Leave a Comment

As pointed out by my friend @stkbullgod the VIX ETPs had an interesting year. Check it out:

VXX - 25% YTD SVXY - 11% YTD

VXX – 25% YTD
SVXY – 11% YTD

One would expect SVXY to be UP around 25% given where VXX is but that is not the case. There is a 36% difference! The VXX borrow rate was ~5% on last check so let’s say 30%. Similar results with XIV (I focus on SVXY as it is an ETF with options as opposed to XIV which is an ETN). This is likely due to compounding issues with any inverse ETF product, a topic that has been readily discussed. Just to make sure, let’s look at a period in 2014 where SVXY was steadily rising and we should see it outperform a short VXX strategy.

VXX -35% SVXY +48.5%

VXX -35%
SVXY +48.5%

So there’s about a 13% delta in performance during this sample from April 1st to July 1st. On the short side, XIV is usable as well.

I was about to run a back test and then found that I already did this so I just updated till today:

No Borrow Cost Included

No Borrow Cost Included

There is no rebalancing in the above test, starting with an initial 100k short of XIV and VXX. Here is rebalancing profits yearly:



The Performance Question

•December 14, 2014 • Leave a Comment

“How much are you up this year?” Ummm, in investment management you can usually answer this question without hesitation. In prop trading at a broker-dealer, this is a much harder question to ask without crossing into dollar amounts. Which is slightly awkward, it’s like asking someone at a cocktail party what their salary is, a cringe worthy question. To compound the difficulty, my capital was increased a number of times making percentage calculations a mind numbing conversation.

At a prop firm such as ours, there is a big pool of capital that is then leveraged and in essence shared among all the portfolio managers and you are assigned various risk metrics. To simplify all the rules, you are assigned a “box size”. And all the metrics are more or less a percentage of this amount. But that is not actually the CAPITAL you are given. The actual capital is somewhat nebulous, and it can be shifted and transferred among the pool at any time. It would be similar to how the old Investment Bank prop desks ran where capital was basically unlimited but risk was not. They called it VAR and we called it draw down but similar concept.

So I went about calculating my performance to answer this vexing question which I knew was going to continue to come up. So after some thought I considered 2 methods of calculation:

1) Return on Equity – Since we can assume that a 10% draw down of your box will result in termination, we know there is an equity figure where you will be kindly asked to close all positions and meet someone in the conference room. Remember to pack ahead! For example, if you have a $5MM box, you can assume that if you are down $500k (10% draw down) that you will be shown the door. Similarly if you ran your own money, once your account goes to $0.00 you are done. So this is approximately the equity one would need to maintain in the account to absorb losses in a leveraged environment or “first-loss” capital.

ROE Performance

If one assumes termination at 5% (Bluecrest cut capital at 3% I believe) then double these figues


2) Return on Overnight Capital – Although you are given in the example $5MM, this is only intra day capital. We were limited to 50% of the box overnight, being that I am an overnight trader I believe using the overnight capital account makes sense as well. In a non-leveraged account this is the amount of capital I would need to hold my positions. I probably only bumped into this number on a handful of occasions when trading common stock positions.

ROC Performance

Another metric that might be useful is return on maximum margin utilized but unfortunately I do not have that data.

I also feel that performance needs an adjustment for costs. At ~.01 per shares and $1 per option contract, plus pass through charges, plus desk fees, plus LIBOR+1.25 on financing and receiving no short rebate, our costs were well above what could be expected at any other place except perhaps another prop trading shop.

Lastly, I calculated the Sharpe Ratio. It’s pretty easy to see the return percentage basically is a function of the denominator you decide to use but how about the shape of the curve? Another question with a non trivial answer, at a prop trading operation since one doesn’t receive any interest from cash balance, should I subtract the “risk free” rate of return? I utilized 2 different risk free rate of return, both the 13 week and the 10 year. It turns out that since the return on 13 week T-Bills is basically 0 it is similar to taking it out.

 Sharpe Ratio At Cost  Commish Adj
 13 week T-Bill 1.23 1.23 1.39 1.39
 10 Year Treasury 1.17 0.92  1.09 1.33

Looking at the shape of the equity curve, I obviously had some draw down periods but overall the curve is trending up and to the right. Each “event” I took as a learning opportunity and have made strides in adjusting my strategy. These events were easily identified in retrospect but were mostly due to human error in overriding the general system. As my account size grew it was easier to structure trades and still reach desired absolute returns. I hope to write more on this soon!

If anyone was curious on the state of the job market, there are opportunities to trade capital however the ‘strings’ attached are more onerous (fees, payout, risk tolerance etc are very skewed towards capital provider) I have been pursuing positions outside of typical front office roles and that has been extremely robust, especially manager selection and hedge fund research. Surprisingly so in fact. Finally, this blog and twitter have been phenomenal resources and the outreach has been wonderful so thank you and Happy Holidays to any and all readers!

Turn and Face the Strange

•November 7, 2014 • 3 Comments

In October there were 2 very large life changes for me, one was my marriage to @FoxyQuant:

That's not a postcard, that's actually us. Thanks Jay Seth!

That’s not a postcard, that’s actually us. Thanks Jay Seth!

2nd was my departure from my firm of the last 5 years. I guess in Wall Street terms, 5 years is a good run. As part of my exit, I signed a confidentiality clause, a non-compete, and non-disparage clause so the reasoning I can offer here is limited. I can say that I had my personal best performance through Q3 and capital raised twice during the year. And while I did experience a draw down in the first few weeks of October, I was well within the defined limits and obviously had I held the positions, it’s very likely that I would be at high water mark currently. VIX 31 to 14 is my wheelhouse!

2014 Performance Q1-Q3

As with previous years performance, I am posting absolute daily returns. Over the course of the year my capital was increased once in January and once at the beginning of October. Therefore the scale/magnitude of both draw downs and draw ups (?) are impossible to compare.

Ironically, the volatility trading portion of the book delivered flattish results. Much of the gain this year was due to individual positions and risk arbitrage. I have a very strong conviction though, that similar to 2012, had I continued through year end the volatility portion would have been the primary P&L driver this year.

So currently I am enjoying the married life and looking at new opportunities. After 5 years I have an extensive network in the prop trading world however I feel it is prudent to look beyond that world. Recent events have made me think more about stability, both of a business and of capital, then in the past. Business risk was always something I knew of but only recently understood. As such, I am contemplating positions closer to the investor side of the business as opposed to management side. Positions in manager selection/asset allocation or perhaps even investor relations might be interesting. I haven’t really decided, at this time I’m simply doing research and talking to as many people as I can. My email is, please feel free to contact me with suggestions, advice, or chat!

XIV & ZIV historical data

•November 1, 2014 • Leave a Comment

Perusing the internet I found a neat little site: 

On one specific post, a commentator posted his link to reconstructed XIV, ZIV, VXX, and VXZ from 2004 using historical VIX futures and the methodology from the prospectus. Good stuff and huge thanks to quantstrat and Helmuth Vollmeier!




XIV 2004


Edit 11/10/14:

After some thought I realized the simulated XIV/ZIV data may be incorrect. While it follows the underlying methodology from the prospectus, I’m not sure if it includes ‘compounding drag’ inherent in the inverse product. You can see the effects here:

XIV vs VXX 3 month performance

I sent some inquires out, hopefully the author of the data can weigh in soon!

Edit 11/25/14:

Vance Harwood at SixFigureInvesting actually has also recreated XIV back to 2004. I’m not sure which came first but either way in the comment section of his blog, a reader had a similar question as I did regarding ‘drag’ on the inverse ETN; here is the response:

I stand by my calculations. I think the core part of your argument is that you think a 439% gain (my number is 409%) from March 2004 to December 2005 seems unlikely. It turns out that period of the market was extraordinarily quiet with a maximum closing VIX of 19.96. In quiet periods such as this the contango losses on the long side are very heavy. My calculations on the long index for short term volatility (SPVXSP) would be a decrease from 590277 to 100000 over that period, which would amount to a 8.8% monthly drop. This is not unprecedented, in the 13 month period between VXX reverse splits from Oct 2012 to Nov 2013 the long side dropped at a monthly rate of 8.5% even though there were 3 VIX spikes of 20 or higher. A glance at the log chart on my post would show other times where the rate of decline in VXX was higher than the simulated 2004 to Dec 2005 timeframe. A compounded rate of 8.8% would give a gain of 487% for an inverse strategy over the 21 month period you mention. Volatility drag would decrease the realizable amount by some, but the compounding benefits of a trending security would tend to counteract that–so the 409% value is reasonable.

My simulation tracks the actual XIV IV values within +-0.2% since inception and it tracks the underlying index (SPVXSP) within +- 0.01% to the Dec 20th 2005 index start value. So I think it is highly unlikely my methodology is incorrect. The biggest uncertainty in that 2004 to 2005 timeframe is that in some timeframes the front month futures were not being traded. I used an variance based extrapolation to project the front month values in those cases. The resultant values are within historic term structure ranges.

It turns out that XIV is based on the SPVXSP index not the SPVIXSTR index you mentioned. The differences are not large, but the one you mentioned is a total returns index which includes a treasury bill component that SPVXSP does not have.


The Great Depression: A Diary

•April 26, 2014 • 1 Comment

Depression diary

This is an excellent book from a lawyer in Youngstown, Ohio during the Great Depression. It is presented in diary style similar to Part 2 of George Soros, The Alchemy of Finance. It begins about a year after the stock market crash of 1929 and continues to the middle of World War 2. Each paragraph is an entry on a specific date and the reader follows with Mr Roth as he describes the mood, the stock prices, the politics, on a month to month basis. We can see Mr Roth grow more competent in the fields of politics and economics as the years pass and it reads excitedly as we approach the war years. Additionally, Mr Roth made various predictions and then came back later into his diary to see how his initial prediction played out through is annotations. There are interesting interviews with the people of Youngstown and some of their unfortunate outcomes in speculating during those times. He also came to many important conclusions about the stock market:

1) Most predictions are worthless, especially by pundits

2) Buy stocks below intrinsic value, sell them above.

3) Patience and cash is king. Buy during a depression. Many people KNEW stocks were a good buy they simply couldn’t because of lack of capital or those that did hoarded or saved their capital for fear of continued or prolonged lean years. “Not 1 man in a million succeeded in doing this and that is why the millionaire club is still exclusive” [I am reminded of Seth Klarman being mostly in cash right now.]

4) Cycles seem to come to play and many of his predictions that turned out correctly are a mix of cycles and sentiment.

5) Opportunities exist in re-organized equity and distressed equity.

6) Do not speculate but invest for the long term and have your money work for you. Invest in the best stocks at good prices and hold until the crowd is giddy. “Difficulty diminishes with distance”

Some other interesting tidbits from the book regarding government stimulus:

Did you know the Federal Reserve already tried QE? The Federal Reserve bot government bonds to supply capital to the banking system but surprise, they simply hoarded it.

“when business starts moving, credit will expand automatically but artificial creation of credit will not expand business.”

Interest rates were around 2% yet dividend yields on equities were 5%-6%

He seems enamored with government debts and the threat to inflation though it never came to pass during the time of the book. There is constant mention of inflation or the threat thereof in this book.

The result of the government stimulus? A momentary boom period from about 1933 to 1937 which subsequently re-traced. The years of 1937 till the start of the war in 1939 are described almost as bad as the years after the crash. The New Deal economics instituted many programs that in essence, gave money directly to labor along with a huge windfall when World War 1 pay was released that caused a momentary burst in the economy. When these programs were ended or taxed the effects wore off. In September of 1940 the Selective Training and Service Act (DRAFT) went into effect, numerous men were turned away due to malnutrition and the nation still had 15% unemployment!

stock chart depression

During the 1938 recession, stocks broke FIRST, Mr Roth noticed that the stock market broke lower without any fundamental news. His empirical observation was that stores were full and people were mostly optimistic. It wasn’t until a few months when the fundamentals and the overall economy caught up to price action. It caught almost everyone off guard.

When the War was in it’s early stages and the US was supplying arms to Britain and the Allies, industrial production was up, corporate earnings were up, but despite an initial bounce off lows stocks were flat. In fact, business was so slow, NYSE seats were sold at record low prices. This persisted for a few years till America formally entered the War and it looked clear the Allies would win. Subsequently there was a large post-war rally. 

It wasn’t until government spending on the War effort did government spending actually rectify the economic malaise. Government and big-business were forced to come together. Business leaders were asked to join government organizations and a symbiotic relationship was developed. Only then did stimulus spending “work”. Interesting food for thought.

Finally, while this blog and my day job is dedicated to shorter term trading, I have been actively trying to learn and apply Value investing principles that Mr Roth described in my personal account. For those that don’t know I’ve started a more value oriented idea blog here.

Capital Allocation

•April 20, 2014 • Leave a Comment



It seems there has been far more focus on Capital Allocation and specifically with Hedge Fund seeding/incubation in recent years. It has always been difficult to attract capital but are those with the capital actually doing a good job? How is investing in a fund any different, on the surface, from investing in an equity or CEO?

Go home & get your shine box

•March 10, 2014 • Leave a Comment

An article in FT caught my attention with a clever headline:

Why the new shoeshine boy trade is shorting volatility

It immediately reminded me of Goodfellas. The basis of the article is comments from Christopher Cole of Artemis Capital. His pieces are well researched and always interesting. His original piece can be found here and I recommend reading it!

One argument Mr Cole makes is that the market can simply be broken down into short and long vol trades, whether people know it or not. I have said before I believe that is the case, too much money and not enough ideas.

ShortLong Vol

Another observation is the volatility regime that exists in Japan where volatility is used as an income enhancement or carry trade. This resulted in lower volatility with high risk of extreme spikes. I believe that is the regime we are currently in.


But another outcome that should be considered is the volatility regime of the late 90’s or the right-tail regime that Mr. Cole describes. This was a period where both S&P and volatility rose in unison. This would frustrate a large number of short volatility players as they are losing money when the market rises, and from experience that is very difficult pill to swallow. In my trading I have converted to shorting SPX put options and actively hedging with stock to take a more directional view on the market.

Additionally JP Morgan had an interesting chart of the correlation between net exposure of the VIX ETPs and the Term Structure. It seems to corroborate that indeed long XIV, SVXY, short volatility is a crowded trade and significantly effecting the roll yield.

VXX AUM vs Term

It will be hard to balance carry and ‘crisis alpha’ trades but I believe if one has the patience, the carry alpha can be significant as the spikes could be more extreme. Trying to balance both is proving to be challenging…