Year end rally? Portfolio Performance + 32% collapse of front month vol. Mini rally easing into HSI, however China risk a large risk.

Year end rally? Portfolio Performance + 32% collapse of front month vol.  Mini rally easing into HSI, however China risk a large risk.

As we mentioned in our earlier post, we explored the question, what if we need to get back into risk on?  EM funds had 10 weeks of outflows, high cash levels and inverted vol curve all showed max fear, leading us to believe that max pain was up and we shorted front month vol to express this view.  In addition, we had noticed the street was focused on owning gamma and selling vega.   Supply/Demand metrics also supported our thesis

1. The front collapsed, the back stayed sticky.

Curve Flattening Graph

Massive Collapse in front month

2. Portfolio Performance + 32%



3. SPX var curve, SX5E and HSI

The US, Europe calms down after important jobs comes in ok





Asia -ex Japan vols continued to stay bid, as we discussed before, the global problems of the world continue to move east and since Europe is at TARP stage, we can expect that markets will now slowly move to China and the headlines about Dexia will be replaced with Dang Dang.  However, we can also expect that this situation, no matter how it manifests, will not be the same as Europe, the governments have plenty of cash to inject into the system and the world simply needs China to work and work really well.  This path of these events is clearly no easy task to discount and we expect this fear to stay priced into the long dated var swaps globally.