Hedge funds are making significant bets that low volatility will persist, with short positions on the Cboe Volatility Index (VIX) reaching levels not seen in three years. Data from the Commodity Futures Trading Commission (CFTC) reveals that hedge funds and large speculators held net short futures tied to the VIX by approximately 92,786 contracts in the week ending August 19. This extreme positioning has historically preceded periods of increased market turbulence and stock market losses. The Cboe Volatility Index (VIX) is a real-time market index representing the market’s expectations for volatility over the coming 30 days. It is derived from the price inputs of S&P 500 index options.
According to Chris Murphy, co-head of derivatives strategy at Susquehanna, these aggressive bets against the VIX suggest either strong confidence or potential complacency among traders. He cautions that such stretched positioning could leave traders vulnerable if volatility unexpectedly surges. The current short volatility bet is fuelled by the resilience of the economy despite tariffs.
Similar situations have occurred in the past, such as in February 2025, when the S&P 500 Index reached its peak and volatility spiked due to concerns over President Trump’s trade wars. Pro traders, who had anticipated low volatility at the start of the year, were caught off guard and forced to cover their positions. A similar scenario unfolded in July 2024, when extreme short positions on the VIX preceded the market upheaval caused by the unwinding of the yen carry trade in August.
It is important to note that the CFTC data does not include positioning in exchange-traded products (ETPs) or the activities of traders who use a mix of long and short positions for hedging or relative value strategies. Investors should therefore consider these factors when interpreting the overall market sentiment.
