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Ruffer, the fund management group famed for saving its investors from the 2008 financial crisis, has been identified as a big buyer of volatility options designed to protect its funds from another market crash.
According to the Financial Times, bankers and traders believe the defensive, multi-asset manager has bought millions of dollars of options on the Vix 'fear' index, taking advantage of an eerie calm in markets.
Sector specialists have reportedly dubbed the buyer of the whale-sized position as '50 Cent', after the pricing of the contract, and the early-2000s rap impresario turned vitamin water tycoon, said the FT.
A single buyer has purchased $120 million of Vix options recently, or around 8.5% of the open interest in Vix call options, said Macro Risk Advisor’s head of derivatives Pravit Chintawongvanich.
‘It is a very big position’ he told the paper.
If Ruffer is behind the trade it would be betting that a surge in volatility caused by a callapse in bond and equity markets would see the value of the options soar.
Ruffer has repeatedly warned about the risks of complacency in asset markets and its performance has suffered at points in recent years, as it remained leery of equity prices.
In a letter to investors last month, the company's founder Jonathan Ruffer warned that US stock markets at their current pricing were highly exposed to a potential sharp shock, as western electorates rebelled against a decade of stagnant income and decades of rising inequality.
‘The working man has started the fight back, and our judgment is that they are set to win the coming battle,’ he said. ‘This is very bad for profits.
'If profitability is set to decline, we should expect a lower valuation on lower profits – and this is why falling markets shock people – they don’t see the double-punch of a lower rating on lower profits coming.’
Vix pricing is near record lows, closing below 10 on Monday, a level only breached nine times in the last 27 years and a level last experienced in 2007. So far around $88 million of the options have expired valueless, however.
In the past five years Ruffer Investment Company has underperformed other funds focused on capital preservation with a total shareholder return of 27.5% compared to a 62% rise in the FTSE All Share. Over 10 years, however, its avoidance of losses in 2008 mean it has generated a total investment return of nearly 143%, beating the 66% of the All Share and not enduring the wild swings of the index.
Ruffer Total Return meanwhile achieved a total return of 31.7% in the five years to end of April, placing the fund 16th out of 39 in the Mixed Assets Absolute Return sector. Over ten years it delivered 117%, ranking it second out of 19 funds in the sector.