Mathematical models underlie an estimated $2 Trillion of structured products sold to investors desperate for higher returns than conventional debt has offered over the last decade.  Camouflaged behind a multitude of innocuous sounding names, the common denominator is the promise of higher returns using a bit of leverage or some derivative strategy.  Many of these active trading strategies, such as “Risk Parity” depend on the ability to execute high volume trades when the manager (almost certainly his computer algorithm) dictate.  This required “liquidity” tends to vanish whenever there is a disturbance in the force.

On February 5, 2018, there was such a disturbance.  Two funds that had “short volatility” strategies were closed down by their managers after the assets in the funds were wiped out.  $3 Billion of unwary investor monies were transferred to the sophisticates on the other side of the trades.

Caveat Emptor!