Allianz Covid Blow-Up and Risk Management

[Same Lazy Element]

Please enlighten me what facts are wrong there

Was not a personal swipe by any means, just felt that it was in general very light on detail and got some stuff factually wrong. My suspicion is that you are a very broad volatility specialist and were not involved in these markets. Off the top of my head:

* Capstone Asia losses where primarily driven by exotic variance swaps that were specifically leveraging dislocations driven by the high autocallable issuance in Asia (in fairness, they did have Kospi exposure, but not in var/var form). The firm was not shut down, Capstone is still around and is doing very well, they only shutdown the Asia-specific volarb vehicle.

* Malachite was actually trading a relative value strategy, since they were hedging capped/uncapped variance with wingy VIX calls. In fact, they made money on the strategy in 2015 when implied moved a lot more than realized.

* You really don't understand what Parplus/Ronin blowup was all about. It was more or less a perfect storm lasting less than a day. It was very specific to the VIX trade they were doing and it takes a lot of detail to understand how exactly it went so wrong.

* In case of both Citadel and LTCM, these were such multi-faceted blowups that any single factor (variance swaps or equity derivatives) attribution is silly. For example, in 2007-2008 Citadel lost over a billion and a half on a single rates options position.

I can't speak of other blowups. I have interviewed a guy who worked at LJM so I got some details about the strategy, but it was just silly and not worth discussing (though they did almost blow up Wells Fargo Prime, lol). I don't trade commodity derivatives, so I can't comment about the OptionSellers.com.

 

[volguy27]

Was not a personal swipe by any means, just felt that it was in general very light on detail and got some stuff factually wrong. My suspicion is that you are a very broad volatility specialist and were not involved in these markets. Off the top of my head:

* Capstone Asia losses where primarily driven by exotic variance swaps that were specifically leveraging dislocations driven by the high autocallable issuance in Asia (in fairness, they did have Kospi exposure, but not in var/var form). The firm was not shut down, Capstone is still around and is doing very well, they only shutdown the Asia-specific volarb vehicle.

* Malachite was actually trading a relative value strategy, since they were hedging capped/uncapped variance with wingy VIX calls. In fact, they made money on the strategy in 2015 when implied moved a lot more than realized.

* You really don't understand what Parplus/Ronin blowup was all about. It was more or less a perfect storm lasting less than a day. It was very specific to the VIX trade they were doing and it takes a lot of detail to understand how exactly it went so wrong.

* In case of both Citadel and LTCM, these were such multi-faceted blowups that any single factor (variance swaps or equity derivatives) attribution is silly. For example, in 2007-2008 Citadel lost over a billion and a half on a single rates options position.

I can't speak of other blowups. I have interviewed a guy who worked at LJM so I got some details about the strategy, but it was just silly and not worth discussing (though they did almost blow up Wells Fargo Prime, lol). I don't trade commodity derivatives, so I can't comment about the OptionSellers.com.

I think it's worthwhile setting few things straight:

1. At any point I did not say that Capstone as a fund was shutdown. I said that Capstone shutdown it's Asia vol fund. I spoke with equity sales people that covered them at that time, and according to them their kospi-nikkei varswap trade blew up, and caused massive losses.

2. Re Malachite, I did state that they were extremely profitable in the years up to 2020, and they did blow up because of VarSwap trades that went awfully wrong (mostly due to selling VarSwap caps, which is what you refer to as capped/uncapped spread).

3. I don't see how my description of their case imply anything but lack of ability to meet margins. I understand margins on VIX/SPX pretty good so I can see how, given the heightened volatility around that time could cause unusually large margin call (believe me I was there, and my risk manager and I ran multiple margin scenarios)

4. Again, I did not say that their losses were solely due to their volatility trades, but these played a significant role in their losses. In LTCM case, their losses in vol trades were the 2nd largest loss after the treasury butterflies. In Citadel case, their losses were mostly due to option trades (not specifically equities), so again, vol trades anyway you twist that

5. I'm a muti-asset volatility manager, so yes, not an equity specialist. Nonetheless, when I wrote this article I did consult sales coverage who are familiar with these cases, as well as Dr. Benn Eifert, who I highly value as a know-all when it comes to volatility trading and the US equity market

 

[Same Lazy Element]

1. At any point I did not say that Capstone as a fund was shutdown. I said that Capstone shutdown it's Asia vol fund. I spoke with equity sales people that covered them at that time, and according to them their kospi-nikkei varswap trade blew up, and caused massive losses.

Really, we gonna do this the adversarial way instead of an adult conversation? Overall the write up was very reasonable, even if short on detail. I was simply making constructive remarks that are based on the fact that I am an EQD specialist, was involved in most of these situations and know people who got blown up personally.

Regardless, you wanna spar so lets spar :

Capstone, I just quote form your blog:
"That natural disaster, which came out of nowhere (literally), caused the fund 11.2% losses in the month of March 2011, and the shutdown of the firm (eventually)."
That surely reads as if Capstone "the firm" has shutdown, not just a single vehicle which get opened and shutdown all the time. I am intimately familiar with the positions the fund was holding at the time since I was one of their biggest counter-parties, though it's possible that your sales people and myself are both right somewhat - like two blind people describing an elephant.

2. Re Malachite, I did state that they were extremely profitable in the years up to 2020, and they did blow up because of VarSwap trades that went awfully wrong (mostly due to selling VarSwap caps, which is what you refer to as capped/uncapped spread).

Capped/uncapped trades as a spread, this way it perfectly replicates the dealer exposure - that's the standard way of structuring these trades. I have traded a lot of these over the years in the business. But yes, that trade makes them short variance caps.

My main gripe was that you omitted the fact that it was presented to the investors a relative value strategy and that the managers actually felt it really was hedged. As details go, it's an important one, because it really re-frames what exactly happened and where the PMs went wrong.

3. I don't see how my description of their case imply anything but lack of ability to meet margins. I understand margins on VIX/SPX pretty good so I can see how, given the heightened volatility around that time could cause unusually large margin call (believe me I was there, and my risk manager and I ran multiple margin scenarios)

The blowup of Parplus was not a margin issue, unless my Ronin sources have completely mislead me. I'll explain in a PM, it's too much detail to put here.

4. Again, I did not say that their losses were solely due to their volatility trades, but these played a significant role in their losses. In LTCM case, their losses in vol trades were the 2nd largest loss after the treasury butterflies. In Citadel case, their losses were mostly due to option trades (not specifically equities), so again, vol trades anyway you twist that

Well, in case of Citadel the title of the paragraph is "Post-lehman equity derivatives losses", so you where specific about the asset class at least there but anyway, I agree with your point fully.

 

[newwurldmn]

Didn’t citadel lose like a billion on divswaps?

 

[Same Lazy Element]

Didn’t citadel lose like a billion on divswaps?

They did, but if anything, that reinforces @volguy27s point. In a perverted sense, div swap is an equity volatility trade - i.e. even if it does not have a headline Vega number, the crowded exposure comes on the back of options/SN positioning.

 

[newwurldmn]

They did, but if anything, that reinforces @volguy27s point. In a perverted sense, div swap is an equity volatility trade - i.e. even if it does not have a headline Vega number, the crowded exposure comes on the back of options/SN positioning.

Well, there were supposedly short a lot of puts on divs as well.

 

[Same Lazy Element]

Well, there were supposedly short a lot of puts on divs as well.

I was not aware of that, so I assume it was mostly in Europe?