Understanding the VIX

The number of volatility linked investment products has grown significantly since the "great recession." Many of these products are linked to the VIX, or volatility index. Unfortunately, many investors have a limited understanding of what the VIX actually is. Fortunately, in a recent article, the WSJ attempted to provide a brief explanation.

Mutual Fund Performance Persistence

Do high performing mutual funds continue to perform well? This is one of the biggest questions among both investors and researchers. Recently, the WSJ (see article here) studied how funds with five-star Morningstar ratings perform in the years following their high ratings. The results suggest that performance does not persist.

European Derivatives Market

The European Securities and Markets Authority (ESMA) just reported that the European derivatives market has an outstanding notional value of over 450 million euros, representing 33 million open positions. See article here, Luxembourg Post.

Shorting Treasuries

Investors have been expecting interest rates to rise. While this has yet to take place, more traders are taking positions consistent with this view. Potential budget deficits and borrowing costs are also adding to the situation. In response, many investors have reduced their exposure to long-dated Treasuries, as their higher duration would cause a more negative reaction to any increase in rates. Beyond that, other traders have taken increased short positions to benefit from this potential move. See article here, Reuters.

PE and Inflation

When inflation (and therefore the overall interest rate) is low, the present value of future cash flows is higher. As such, there is an inverse relationship between inflation and PE multiples. As inflation rises, PE ratios fall (and vice versa). Historically, the average PE ratio has been equal to 20 minus the inflation rate. See article here, WSJ.

Flawed Risk Surveys?

Most risk tolerance surveys contain similar questions, but behavioral experts suggest such questions may not be measuring what is actually intended. See article here, WSJ.

Return of Subprime?

While it represents a small segment of the overall mortgage market, so-called "nonprime" mortgages are once again gaining popularity. Although they now have a different name (i.e., no longer subprime), the fundamentals (or lack thereof) are similar to those of prior cycles. The extent of their impact will be determined by the broadness of their reach and whether changed regulations will control their risk profile. See article here, Financial Times.