Investors Have Never Been More Short Volatility Futures

Bets against volatility are back.

Never mind strategists warning of a potential VIX rebound, or historical data showing the index tends to jump the most in August. The number of short positions on VIX futures has hit a fresh peak, and an exchange-traded fund that benefits when volatility falls just saw its biggest weekly inflows since June, following three weeks of withdrawals. That’s even as the CBOE Volatility Index hovers within 1 point of its record-low close.

So what may be pushing investors to keep shorting volatility and why is the market so stubbornly calm? Dean Curnutt, CEO of Macro Risk Advisors, said in a note last week it may be due in part to the hedging of long vol positions established before things got this quiet. Here’s what he wrote:

Realized vol is just so low and has already imposed such theta loss that those who own it higher are more trying to get out of the way for now and manage the rent with short-dated variance sales at levels we really aren’t used to seeing.

In conclusion:

Are the collective (re)-hedging pursuits of long-vol holders serving to dampen volatility? The story is an appealing one as market participants seek to explain not just a low-vol period, but an environment that is so quiet that it feels as if some other factor is at work.

— With assistance by Luke Kawa

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