Fifteen years ago, Devesh Shah was still in his 20s when he helped invent the stock market’s current barometer of fear.
It was a new version of the Cboe Volatility Index, a gauge of expected price swings for the S&P 500 Index. The VIX, as it’s known, has become the talk of Wall Street after Monday’s record surge, sending many products tied to it into disarray.
Shah, who left Goldman Sachs Group Inc. in 2010 and manages his own money, spoke to Bloomberg Tuesday. This is a lightly edited transcript.
What’s going through your mind today?
Everybody knew that this was a huge problem. Everybody knows that Inverse VIX is going to go to zero at some point, and all these inverse and leveraged products, not just in the VIX but elsewhere too, at the end of the day cost people a lot of money… And what’s going to happen as a result of this? Nothing, other than in a few months’ time someone’s going to come up with a new XIV, and everyone’s going to start putting money into that. That’s OK, that’s how the world goes.
Should regulators do something about retail VIX products?
In my wildest imagination I don’t know why these products exist. Who do they benefit? No one, except if someone wants to gamble -– then, OK, just go gamble… And who exactly made money? The VXX from its inception in 2009 is down, what, 99%, even after this move… It’s kind of sad that these products exist in the first place, but it’s hard to stop it. If you stop this, something else will come up. Bitcoin will come up.
If someone asks you what the VIX is, what do you say?
It’s the temperature outside. If it’s the winter it’s going to be really low, and if it’s summer it’s going to be really hot. It’s not the cold index or the heat index, it’s just the temperature. It just tells you where things are. When the market’s down a lot and things are bad, of course the VIX is going to be high. And vice versa. It doesn’t tell you anything about the future. And VIX futures are just a next step to that – which is bets on where the temperature is going to be in the future.
Is the VIX driving the market?
Every once in a while, you’ll have an event like yesterday, where there’s a huge amount of re-balancing to be done… So, yes, it has a life of its own, and its life impacts other assets. But I wouldn’t say on a day-to-day basis it moves the S&P so much… Maybe the market was just too high and it needed to come down.
Can you take us back to 2003?
The VIX was something that people knew about, they talked about, they looked at it, and people had opinions as to what to do with the equity market when the VIX was high or the VIX was low. And they were all just opinions. At the same time, there was a big investor base that was opening up that wanted to specifically trade volatility for the sake of volatility… So it was an opportune time for a new invention.