By Brendan Conway

We relayed the prediction on this blog a while back: Sooner or later, sellers of market volatility were bound to get crushed .

Today we see it in the 28% surge in the CBOE Volatility Index. The market for volatility  futures it used to be the province of hedge funds and floor traders; now its wide open via ETFs is sending pain through the exchange-traded funds and notes tied to it.

Bloomberg

A fund which effectively allows investors to sell market volatility, ProShares Short VIX Short-Term Futures ETF  (SVXY ), has slumped nearly 11% Friday.  This is the one we told you in October has offered something on the order of three-fold leverage, or more, on the S&P 500 .

The similarly contructed VelocityShares Daily Inverse VIX Short Term ETN  (XIV ) is down by 11%.

Meanwhile, opposite numbers VelocityShares Daily 2x VIX Short-Term ETN  (TVIX ) and ProShares Ultra VIX Short-Term Futures ETF  (UVXY ), two cant lose losers in 2013, are surging 20% on Friday. Barclays iPath S&P 500 Short-term VIX Futures ETN  (VXX ) is ahead by 7%.

The volatility tourist quip isnt mine. It comes from Christopher Cole , managing partner and founder of Artemis Capital Management. who said this to the FT nearly a year ago :

In a yield hungry world you have a lot of people turning to the easy trade of shorting front month volatility in a believe that the Fed will always have their back. A lot of these players don’t truly understand the asset class but nonetheless are overconfident based on the recent performance and simplicity of directional short bets in vol using simplistic VIX ETNs.

A powerful convexity is being built into short term volatility futures due to excessive programmatic shorting, levered ETNs, and these ‘vol tourists’…

If 2013 begins to look anything like 2007, 2010, or 2011 given the recent expectations of the VIX futures markets these ‘vol tourists’ are in for a nasty surprise.

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