Bridge over ocean
20 May 2021 Financial Analysts Journal Volume 77, Issue 3

Volmageddon and the Failure of Short Volatility Products

  1. Patrick Augustin
  2. Ing-Haw Cheng
  3. Ludovic Van den Bergen

“Volmageddon,” the February 2018 spike in volatility that wiped out short volatility strategies, illustrates the dangers of hedge and leverage rebalancing in highly concentrated and volatile markets.

The rapid growth of exchange-traded products (ETPs) has raised concerns about their implications for financial stability. A case in point is the abrupt market crash of short volatility strategies on 5 February 2018. In this article, we describe this “Volmageddon” event and illustrate the risks associated with hedge and leverage rebalancing when markets are highly concentrated and volatile. The Volmageddon episode provides valuable risk management lessons because it illustrates the pitfalls of hedge and leverage rebalancing and is reminiscent of the losses incurred through portfolio insurance schemes.

Read the Complete Article in Financial Analysts Journal Financial Analysts Journal CFA Institute Member Content

We’re using cookies, but you can turn them off in Privacy Settings.  Otherwise, you are agreeing to our use of cookies.  Accepting cookies does not mean that we are collecting personal data. Learn more in our Privacy Policy.