A wager that stock markets would stay calm has cost retail traders, hedge funds and pension funds billions after a selloff in global stocks, highlighting the risks of piling into a popular bet.
The CBOE VIX index, which tracks the stock market’s expectation of volatility based on S&P 500 index options, posted its largest-ever intraday jump and closed at its highest since October 2020 on Monday as U.S. recession fears and a sharp position unwind have wiped off $6 trillion from global stocks in three weeks.
Some hedge funds were also taking short volatility bets through more complicated trades, two investor sources told Reuters.
A popular hedge-fund trade played on the difference between the low volatility on the S&P 500 (.SPX), index compared to individual stocks that approached all-time highs in May, according to Barclays research from that time.
Hedge-fund research firm PivotalPath follows 25 funds that trade volatility, representing about $21.5 billion in assets under management of the roughly $4-trillion industry.
Hedge funds tended to bet on a VIX rise, but some were short, its data showed. These lost 10% on Aug. 5 while the total group, including hedge funds that were short and long volatility, had a return of between 5.5% and 6.5% on that day, PivotalPath said.