(New York)

The VIX is the predominant measure of volatility. Everyone keeps and eye on it, and everyone trades it. Over the last couple of years many have made great money shorting it. However, the focus on it has now led the index to outgrow itself, says its founder. Now, we have a case of the tail wagging the dog, where instead of the VIX measuring market volatility, the market is watching the VIX, which itself incites volatility. In his own words, VIX founder Sandy Rattray, formerly of Goldman Sachs and now with Man Group, says “The Vix has moved from being a measure of something to being something that influences this thing it is trying to observe”.

FINSUM: Observing the VIX has turned into an obsession to the point where it creates a self-fulfilling prophecy. This is quite similar to the case of technical traders who are all observing the same measure and then all act at the same time, creating the reality they predict.

(New York)

The last two weeks could hardly have been worse for investors. Stocks plunged and bonds are falling, with the former led by obsession over the VIX. However, according to Bloomberg there is a ticket timing much bigger than the VIX, and one you probably aren’t paying much attention too—ETF loan funds. The market is much bigger than the $8 bn of volatility linked ETFs that got wiped out over the last couple of weeks, try $156 billion between loan ETFs and mutual funds. The big worry is that since these kind of illiquid underlying investments—actual loans—cannot be sold so quickly as the ETFs, that it could cause huge losses as ETFs stampede out but fund managers cannot liquidate the underlying quickly enough.

FINSUM: So this is a provocative spin on a common argument. Our counter, however, is that credit worthiness is pretty good overall, so it doesn’t seem like an exodus will occur.

(New York)

So far all the attention of the selloff has been confined to two major areas: Treasury bonds, and to a greater extent, equity markets. Treasuries have stabilized a bit given all the turmoil in equities, but one of the areas investor need to watch carefully is junk bonds. The more equity-like bonds have been holding up well, but finally started to crack this week as outflows have been strong and the main junk bond ETF had its worst day in a year. The spread to Treasuries is still historically low—346 basis points—which means that there is a lot of room for a correction, though Bloomberg says this is giving fund managers some comfort.

FINSUM: If equities keep falling it seems like junk will fall some. However, the protection of yield, and the fact that earnings and credit worthiness are good should be supportive.

(New York)

Despite the rise of ETFs over the last few years and the weak performance of hedge funds, on average, one of the astounding things in asset management has been the staying power of the latter. Hedge funds long had a “2% and 20%” fee structure as standard, and while most discount a bit from there nowadays, fees are still very high—hundreds of times low-priced ETFs and mutual funds. Bloomberg explains that a big part of that fee goes into paying the brokers that recommend the funds. The payments go by all sorts of names, such as placement fees, payment for shelf space, and retrocessions, but the fact is they boost costs to investors.

FINSUM: Bloomberg tries to make this look dirty, but the reality is that referral fees are standard in many industries. The big question in this area is where this type of arrangement falls when the SEC debuts its new fiduciary rule?

(New York)

Well it is now official, or as official as it can be considering “correction” is a generic term. However, a drop of 10% is widely considered to be a “correction”, and that is the threshold we just crossed after yesterday’s huge losses. Stocks dropped deeply again yesterday, with the Dow falling over 1,000 points, or over 4%, and the S&P 500 nearly that far. Markets fell after positive unemployment claims data fueled fears that the economy is too good, which would lead to a tightening Fed and bring about a recession.

FINSUM: It is quite odd that the markets are afraid the economy is too good. We recognize how a hot economy brings about issues, but we just don’t think we are there yet.