Hedge Funds Buying VIX Futures on Expectations of Continued Volatility

Sep 8 2015 | 5:49pm ET

The return of volatility to financial markets over the past several weeks has hedge fund traders making bets that the swings will continue. 

CFTC data released last week show hedge funds and other speculators doubled their investments in positions that will rise in value should equity volatility increase just a week after pushing the measure to a record, according to a Bloomberg article. 

At the same time, prices for S&P 500 put options are also near a record high, Bloomberg noted. Investors, spooked by events in China and a looming Federal Reserve interest rate hike, are wagering the swoons and swings in stock prices will continue. 

The VIX index, or more officially the Chicago Board Options Exchange Volatility Index, measures investor sentiment, and has been consistently low for several years as equity prices rarely moved more than 1% in a session. Calculated from S&P 500 call and put option prices, low VIX levels imply investor complacency, while high levels mean they’re generally expecting a roller coaster. The VIX rose 6.7% last week to 27.8, nearly twice as high as its three-year average, according to Bloomberg, and reached over 40 on August 24 as the rails came off the Chinese stock market. Both are far above the 12-13 levels seen in April.  

However, the VIX is also sometimes seen as a contrarian indicator, since investors’ complacency and nervousness typically show up in the measure after things happen, not before. The VIX has dropped steadily dropped since late August and is now back under 25. With so much horsepower expecting additional fireworks, this fall will be a renewed litmus test for VIX’s contrarian reputation. 

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