Global Stock Selloff Highlights Perils of Short-Volatility Bets

Retail traders, hedge funds, and pension funds faced significant losses due to a selloff in global stocks linked to short-volatility bets. The VIX index saw a record intraday jump and closed at its highest since October 2020. Banks and various financial instruments played roles in these complex trades.

A sudden selloff in global stocks has cost retail traders, hedge funds, and pension funds billions, exposing the inherent risks in short-volatility bets. The CBOE VIX index, a prominent measure of market volatility expectations, experienced its largest-ever intraday spike, closing at its highest mark since October 2020 amid mounting U.S. recession concerns and sharp position unwinds.

According to Reuters' analysis and data from LSEG and Morningstar, investors in the top 10 short-volatility ETFs saw $4.1 billion in returns wiped out. These funds, which profit as long as the VIX remains low, became exceedingly popular, attracting investments from both retail and institutional players.

Banks, attempting to hedge their exposure to the booming demand for volatility options, may have inadvertently contributed to market calm before the trades turned negative. Despite the complexity of these trades, publicly available ETF performance data only partially reflect the actual losses, with hedge funds and pension funds trading privately through banks seeing more significant impacts.

(With inputs from agencies.)