Traders lose billions due to extreme volatility following the stock market meltdown
Retail traders, hedge funds, and pension funds have lost billions on bets that the stock markets will remain calm during a selloff in global stocks, underscoring the dangers of multiplying on a well-liked play, News.az reports citing Reuters .
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.Investors in 10 of the biggest short-volatility exchange traded funds saw $4.1 billion of returns erased from highs reached earlier in the year, according to calculations by Reuters and data from LSEG and Morningstar.
These were bets against volatility that made money as long as the VIX (.VIX), opens new tab, the most-watched gauge of investor anxiety, remained low.
Wagers on volatility options became so popular that banks, in an effort to hedge the new business they were receiving, might have contributed to market calm before the trades suddenly turned negative on Aug. 5, investors and analysts said.
Billions flew in from retail investors but the trades also garnered the attention of hedge funds and pension funds.
While the total number of bets is difficult to pin down, JPMorgan (JPM.N), opens new tab estimated in March that assets managed in publicly traded short volatility ETFs roughly totaled $100 billion.
"All you have to do is just look at the intra-day rate of change in the VIX on Aug. 5 to see the billions in losses from those with short vol strategies," said Larry McDonald, author of How to Listen When Markets Speak.
But McDonald, who has written about how bets against volatility went wrong in 2018, said publicly available data on ETF performance did not fully reflect losses incurred by pension funds and hedge funds, which trade privately through banks.
On Wednesday, the VIX had recovered to around 23 points, well off Monday's high above 65, but holding above levels seen just a week ago.
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