Hedge Fund Cash Flows Back to Bets That VIX at 20 Won't Last

  • Pair of long VIX funds have gotten $140 million over last week
  • Hedge funds hold the most long bets on VIX since September

Hedge funds and investors in exchange-traded notes are plowing money into bets that pay off should last week’s soothing of U.S. stock market turbulence prove temporary.

With the Chicago Boards Options Exchange Volatility Index closing below 20 for just the third time this year, a pair of securities that track the gauge have seen combined inflows of $140 million over the last week after losing almost $1 billion to start 2016. Hedge funds hold more long bets on VIX futures that any time since September, data from the U.S. Commodity Futures Trading Commission show.

“There’s a contingent out there that believes the VIX has come down too hard, too fast,” said Dan Deming a Chicago-based manager at KKM Financial LLC. “For those looking for a quick turn, getting long VIX ahead of a short-term momentum shift is an easy way to get exposure to the volatility space.”

Through Monday, the VIX had plummeted 31 percent over six straight days, the longest such streak since October. The slide came as more than $1 trillion was added back to U.S. share values and the Standard & Poor’s 500 Index climbed 6.4 percent, led by gains in beaten-down bank and energy shares.

Even as fear was draining from markets traders built long positions in the VIX, using both futures and exchange-traded notes tied to volatility, which are among the most-traded securities in the America. Those positions profited yesterday, when the volatility gauge increased 8.3 percent to 20.98. The VIX fell 1.2 percent to 20.72 at 4 p.m. in New York.

Investors got a reminder Tuesday of their vulnerability to macroeconomic threats, ranging from China’s falling currency to a selloff in crude oil, as the S&P 500 Index lost 1.3 percent to 1,921.27. The decline came just two days after the benchmark gauge’s best week of the year, spurred by improving economic data and the worst sentiment readings in three years.

Two securities betting on a VIX increase started to see net inflows at the start of last week. Since Feb. 16, the iPath S&P 500 VIX Short-Term Futures ETN has absorbed $46 million, while the ProShares Ultra VIX Short-Term Futures ETF has received $93 million. That’s a reversal from the $933 million in combined outflows from the two securities from the start of 2016 through Feb. 12.

Last week’s S&P 500 rally was seen partially as a reaction to market sentiment that by some measures was the worst in three years. The previous week, a survey of newsletter writers by Investors Intelligence showed the lowest spread between bulls and bears since April 2013. But that could just as easily work against investors, according to Andrew Brenner of National Alliance Capital Markets.

“The negative sentiment numbers are just absurdly overwhelming,” said Brenner, head of international fixed income at National Alliance in New York. “There’s no conviction. The nervousness of the market is still out there.”

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