Traders Are Withdrawing Money From VIX Funds Like Never Before
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While stocks are having a chaotic start to the year, investors are pulling money from securities that profit from higher volatility at the same time as short sellers are piling into bets that tranquility will return.
Traders yanked $850 million from two of the most popular exchange-traded products tracking moves in the Chicago Board Options Exchange Volatility Index in January. That’s even as the gauge of investor anxiousness known as the VIX is set for its biggest monthly surge since August. In one note, bearish bets briefly climbed to more than 100 percent of shares outstanding.
The positioning reflects speculation that something will cause volatility to drain out of a U.S. stock market where as much as $2.4 trillion of value was erased. Traders such as Mizuho Securities USA Inc.’s Monish Shah and JonesTrading Institutional Services’ Dave Lutz say the selloff has gone too far and that central banks will help counter the effects of a Chinese economic slowdown and slump in oil.
“Central banks, historically acting as shock absorbers, eventually came to the rescue and adopted a dovish tone, thereby implicitly indicating that ‘We are here to take care of the situation, so don’t worry,”’ said Shah, the head of ETF business at Mizuho Securities in New York. “This will help stabilize the market and reduce volatility in the short term.”
How high did volatility get this year? Consider that last week, front-month VIX futures were 22 percent higher than those expiring in July. That’s the biggest premium since September and one of the highest since 2011 for contracts that usually cost less than longer-term bets.
The Standard & Poor’s 500 Index has lost 8.2 percent this month, heading for its biggest plunge since May 2010, on mounting worries that the Federal Reserve removed its life support too soon. The VIX, which tends to move inversely to U.S. stocks, has risen 33 percent -- and securities that climb with it have jumped too.
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