Expect a Volatile Future: Short-Volatility Funds Flooded With Cash

Posted: Nov 09, 2017 12:01 AM
Stock market volatility is a uni-directional measure. Volatility only rises when stocks decline. Curiously, the futures markets often work in reverse. When precious metals soar, the price of options on futures often rises instead of collapsing.

Exchange-trade products betting that volatility will sink lower have never been more popular as Short-Volatility Funds Are Being Flooded With Cash.

Even as the CBOE Volatility Index plunges to its lowest on record and U.S. stocks march to fresh highs, investors have continued to give the short-volatility trade their vote of confidence this year. With $2.4 billion in assets, short volatility exchange-traded funds are backed by the most cash on record, according to data compiled by Bloomberg.The funds’ meteoric rise is to some degree a bet that the U.S. stock market will keep rising, since the VIX and S&P 500 move in opposite directions about 80 percent of the time. With the S&P 500 up 16 percent and at its highest on record, the $1.1 billion VelocityShare Daily Inverse VIX ETN has surged 141 percent, heading toward its best yearly performance in five years.For now, the volatility bears have the momentum. Inverse VIX funds have nearly tripled in size this year alone. The amount of assets tracking short-volatility products rose above that of their long-volatility counterparts for the first time in two years in the third quarter.

Pennies In Front of Steam Roller

As it is in front of every market top, investors plow into the "sure thing" cannot-go-wrong trade.

Of course, we do not know when this maina will end, we just know that it will, to the extreme detriment of those late to the party.

That's a hint to those who think another 10,000% or even another 1,000% rise in Bitcoin is a "sure thing".

Mike "Mish" Shedlock