Friday, March 29, 2024
HomemarketsHedge fund bets on a smooth stock market may backfire after finally...

Hedge fund bets on a smooth stock market may backfire after finally going too far

  • One of the hottest trades on Wall Street has been to bet on low market volatility.
  • However, measures of volatility have been rising.
  • That reversal could catch hedge funds on the wrong foot.

A trader stands out in front of the New York Stock Exchange in New York City.Getty Images

Hedge funds have been betting on calm markets, and so far that trade has paid off. However, so many investors have made the same bet that several analysts worry the low market volatility can't last much longer, resulting in a large market sell-off.

As measured by short interest in the iPath S&P 500 VIX Short-Term Futures exchange-traded note (VXX), bets against stock market swings have shot up to their highest on record.

The VXX tracks futures contracts for the CBOE Volatility Index (.VIX). The VIX is widely considered the best gauge of fear in the market and measures the buying of put and call options on the S&P 500 near-term options.

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