Volatility Bet Backfires: Billions Lost Amid Market Selloff

A dramatic rise in the CBOE VIX index has caused massive losses for retail traders, hedge funds, and pension funds, who bet against market volatility. The VIX's surge erased billions in returns from popular short-volatility exchange-traded funds (ETFs), emphasizing the risks of such speculative investments.

A wager that stock markets would remain calm has cost retail traders, hedge funds, and pension funds billions after a significant selloff in global stocks highlighted the risks of popular bets.

The CBOE VIX index, which monitors the stock market's volatility expectations based on S&P 500 index options, experienced its largest-ever intraday jump and closed at its highest point since October 2020. U.S. recession fears and a sharp unwinding of positions have wiped out $6 trillion in global stocks over three weeks. According to calculations by Reuters and data from LSEG and Morningstar, investors in ten of the biggest short-volatility exchange traded funds saw $4.1 billion in returns disappear from their previous highs earlier this year.

These bets against volatility yielded profits as long as the VIX, the most-watched gauge of investor anxiety, remained low. Such trades became so popular that banks, trying to hedge the new business they received, might have inadvertently contributed to market calm before the trades turned negative on August 5, according to investors and analysts.