I was drawn to two specific Wall Street Journal articles today:
* Did ‘Volatility Funds’ Deliver? (Ben Levisohn)
* Morgan Stanley Settles SEC Case (Brett Philbin and Ben Fox Rubin)
Some cable news pundits can’t get enough of the VIX, the Chicago Board of Trade’s Volatility Index. They call it the “fear index.” But what actually is it?
The first mentioned WSJ article explains how, “Volatility funds use complicated futures and options strategies to bet on the direction of volatility.” The key word in that sentence is “bet.” The VIX truly is a bet – not an investment, as no real asset (i.e. gold) or business (i.e. Apple) substantiates it. This makes the VIX nothing short of a gamble, nothing short of pure speculation.
Gambling and investment are two completely different things. As a result, the VIX can’t possibly indicate investor fear. Instead it indicates the fear of gamblers – those speculating on volatility, not investing in value. Why should you care?
“Volatility strategies can be housed inside a mutual fund, an exchange-traded fund or note, a hedge fund or a commodity-trading adviser.” Mutual funds are getting harder and harder to own because less and less in known about them. Today it seems that the most important feature of a mutual fund is the number of stars awarded to it by Morningstar.
Listen, mutual funds stink for a lot of reasons — regardless of their star rating. I detail a bunch of reasons in my book. But it’s even worse to know that fund managers are playing games in make believe instruments like the VIX with investor’s money. These kinds of instruments should be illegal in the investment markets – ditto for credit default obligations. They increase market volatility, risk, and steal wealth from the average investor.
Of course, fraud and deception have run roughshod throughout Wall Street of late. Today Morgan Stanley settled its latest infraction (charging consumers fees that never existed) for a few million dollars. Add that to a rap sheet ten miles long and soon you’ll realize that you’re the best chance for your success.
Let me know if I could help.