IMF warns on volatility strategies
Crowded, leveraged bets on low volatility are my guess to be the cause of the next financial crisis.
The IMF is worried too. In an interview with the Financial Times Tobias Adrian, director of the Monetary and Capital Markets Department of the IMF bets on things like the VIX by pension funds and others who are reaching for yield are a dangerous combination.
The IMF estimates that assets invested in volatility targeting strategies have risen to about $500bn, with this amount increasing by more than half over the past three years.
My guess is that it won't be a US meltdown that sparks the crisis. It will be when bets on low volatility begin to crowd into emerging markets. That's what happened in 1998 when the famed Long-Term Capital Management fund lost nearly $5 billion and was bailed out with the help of the Federal Reserve.
It's downfall was triggered by the 1997 Asian financial crisis and the 1998 Russian financial crisis.
The book 'When Genius Failed' details the rise and fall of LTCM; it's a timeless read.
