A quick note from Eric Peters, CIO of One River Asset Management, which explains in very simply terms how as oil tumbled and its volatility soared, virtually everyone who manages large amounts of money missed the oil price rebound.

“Oil is a 60 vol instrument,” said the CIO. “If you’re targeting 10 vol for your fund, how much oil could you own?” he asked. “At most you put 15% of your fund in the trade.” Meaning you had nothing else in the book. “So imagine you caught 50% of the 70% crude rally. Your absolute best case would’ve been a 7.5% gross return.” But of course, few people target 10% vol even if they say they do, and no one puts 100% of their risk in one trade. “So realistically your best case was more likely +2.5% on this heroic rally, which is why the industry is broken.”

As the chart below show, oil vol has dropped to 40 now, which means on a risk adjusted basis it is only modestly more attractive.

Ironically, the higher oil goes, the more attractive it is for those who stayed away when it was at $25 (at a vol of 80), just as the next leg lower – if DB is corect – is about to arrive.