Hedge Funds Are Shorting the VIX at a Rate Never Seen Before

James HughbanksVolatilityLeave a Comment

There is an article on Bloomberg.com talking about the gigantic short position large speculators have in the VIX futures.

There is one important fact that this brings up: It’s near impossible to determine what this actually means, given the fact that nobody knows the rest of the story. That is, are these outright bets that VIX is going to fall? Or is it that these are hedges that are designed to generate profits to offset losses on trades these investors have in long VIX ETFs? Until you know that, it’s hard to tell.

I will say this… I remain concerned about market fragility here. What we’ve seen and I think we will continue to see is low volatility most of the time, with extreme spikes in volatility that seem to come out of nowhere.

Looking back on 2018, we had two such shocks that came on the heels of near-record low volatility. It’s very unusual to have two in one year. In fact, it’s only happened once before, and that was when Europe got embroiled in World War II.

So look for volatility to hold steady or decline from here. But be aware that the risk of a shock coming from some unforeseen event is higher than normal.