Wall Street traders lost billions on Monday as a bet against market volatility turned sour, highlighting the risks of shorting the VIX index amid a global stock selloff. The CBOE VIX index, which measures market volatility, recorded its largest-ever intraday jump, closing at its highest level since October 2020 due to rising U.S. recession fears and a massive unwind of short positions.
The spike in the VIX wiped out $4.1 billion in returns for investors in the top 10 short-volatility ETFs, according to Reuters' calculations based on LSEG and Morningstar data. Hedge funds, pension funds, and retail investors who had bet on calm markets are now facing significant losses as the VIX climbed above 65, erasing gains made earlier in the year.
Market Overview:
- Massive losses for traders shorting market volatility.
- The VIX reached its highest level since October 2020.
- Global stock selloff contributed to market turbulence.
Key Points:
- Short-volatility ETFs lost $4.1 billion in returns.
- Hedge funds and pension funds were significantly impacted.
- ETFs shorting the VIX saw sharp declines in August.
Looking Ahead:
- Potential for continued market volatility and losses.
- Investors may reassess strategies involving volatility.
- Ongoing analysis of market conditions and risk management.
The popularity of zero-day expiry options, which allow traders to take short-term bets on market movements, contributed to the widespread losses. These options became available daily in 2022, increasing opportunities for traders to short volatility while the VIX was low. However, the rapid market shift on August 5 exposed the risks inherent in such strategies.
Banks have also played a central role, hedging clients' volatility trades and potentially contributing to market stability before the sudden volatility spike. Barclays (BCS), Goldman Sachs (GS), and Bank of America (BAC) have been involved in offering complex trade structures combining short- and long-volatility positions. As the VIX surged, investors faced heightened potential losses, exacerbated by some trades' lack of constant hedges.
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