VOL CONTROL/VOL TARGETING
What that got to do with the markets right now?
Well, inverted $VIX has been lagging the #equity index’s and that is a big deal. The reason it is a big deal is because the of VOL TARGETING
Volatility targeting/control strategies aim to control risk by BUYING $VIX as $SPX drops and liquidating $SPX as $VIX rises.
When $SPX makes new lows but $VIX does not the implication is these insurance products continue to buy #ES_F futures while sell $VIX
So what so we have here? We have an entire sector that has built a model where a divergent $VIX = increased $SPX buying via #ES_F futures.
This strategy is roughly $1 tillion in notional and like $SKEW is showing, hopelessly underhedged vs a downside break
Why is this relevant now? Its because Volatility Targeting strategies are more long than they have been in a long time, based on model ideals. So, in an illiquid market, tactical/strategic exposure is likely to reassess those BUYS as soon as inverted $VIX confirms $SPX
What’s the net effect of all this? Well, at worst possible time insurance firms are exposed to tail risks they were 100% seeking to avoid & in the largest exposures in recent history in the most illiquid episode in recent history. Sets up conditions for tails in #equities