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One of the surest bets in the U.S. stock market over the last 2 1/2 years, speculating on tranquility, is being abandoned.
For the first time since 2011, the balance of futures (VIX) owned by hedge funds and other large speculators on the Chicago Board Options Exchange Volatility Index represents wagers that equity turbulence will increase, according to data compiled by the Commodity Futures Trading Commission. Managers added long holdings after a selloff that sent the Standard & Poor?s 500 Index down as much as 9.8 percent in the 26 days ended Oct. 15.
Expectations for equity price swings reached the highest in about three years this month as the VIX touched 31.06, more than twice its average level since the start of 2013. The Federal Reserve?s diminishing presence in the market is making traders hesitant to re-short volatility, according to Dan Deming, managing director at Chicago-based Equity Armor Investments.
?People are realigning their expectations,? Deming said by phone Oct. 27. ?You?re seeing a little bit of a pullback in trying to be short the volatility space. Without the Yellen or Bernanke put, the backstop is viewed is not being as stable as it was.?
Bets against volatility paid off in 2012 and 2013 as the VIX, a gauge of S&P 500 options prices that rises as price swings get more pronounced, plunged 41 percent. Traders who are short VIX futures are betting on calm in the markets.
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