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No winners in one $2 trillion market that’s losing money for everyone



Conventional wisdom would suggest that if one side of a trade is getting crushed, the other side should be making money hand over fist.

But that hasn’t proven to be true this year in the $2 trillion volatility market, as investors find themselves in a situation where the best trade has been to not be involved at all.

The chart below shows this dynamic in play. In 2018, for the first time on record, both long- and short-volatility funds have lost money. And it hasn’t been particularly close, with the two areas down roughly 6% on a year-to-date basis.

Business Insider / Joe Ciolli, data from Bloomberg / Eurekahedge

The reason why boils down to the volatility blow-up that rocked markets earlier this year, worsening a stock sell-off that briefly veered into 10% correction territory. As the Cboe Volatility Index — or VIX — spiked, wildly popular shorts got crushed, and they’ve been crawling out of that hole all year.

As for those positioned long volatility, they’ve since been faced with the same type of environment that so emboldened those shorts in the first place — one defined by muted price swings as major indexes grind higher.

Even though they had a brief moment of glory as the VIX surged, the rest of the year has been extremely difficult as stocks have traded in listless fashion. And they’ve failed to see positive returns.

Long story short, trading volatility is a no-win situation at present time — at least for those who have held positions all year.

The obvious solution for those struggling to make money trading volatility would be to abandon any sort of long-term approach, and instead try to nimbly time whatever minor market fluctuations do transpire.

This is, of course, easier said than done, especially with the prospect of a trade-war flare-up constantly looming. There’s also the groundswell of bearishness around tech that’s been nibbling away at overall market sentiment.

As Facebook‘s forecasted growth slowdown and subsequent stock tumble showed last month, any perceived weakness can cause sharp losses at a moment’s notice.

Count Goldman Sachs among those that aren’t particularly enthused about the volatility market right now. Their current forecast isn’t for high or low volatility — it’s somewhere in that murky chasm in between.

“Based on our vol regime framework, a high vol regime remains unlikely as macro data remain too strong, but the probability of a low vol regime has also declined further,” Christian Mueller-Glissman, a senior multi-asset strategist at Goldman Sachs, wrote in a recent client note. “We think neither a high nor a low vol regime is very likely in the near term.”

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