VHSCEI and HSCEI have become positively correlated, as the weirdness of autocallables plays out. Shorting VHSCEI looks attractive.


In a presentation on autocallables a few months ago, I stated that the hedging needs of autocallable structurers can create an environment where implied volatility can fall when the market falls, and conversely an environment where implied volatility rises as the market rises. HSCEI is giving a perfect example of the this “autocallable weirdness”. HSCEI has been very poor this year as the combination of a regulatory crackdown, zero covid and an aggressive Federal Reserve has seen the HSCEI fall to a low of 5000. But HSCEI has now rallied 27% in November, but VHSCEI has remained at distressed levels of 43.

For those of you blissfully unaware of how equity indices and implied volatility usually trade, I provide a graph of the S&P 500 and VIX over the same time period. S&P 500 has rallied 10% in November, and VIX has fallen from 31 to 22 over the same period. The logic behind this is that there is less demand for market insurance when markets rally.

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