A wager on market calm has cost retail traders, hedge funds, and pension funds billions after a global stock selloff. The CBOE VIX index, which measures expected stock market volatility, saw its largest-ever intraday jump and closed at its highest since October 2020 on Monday. U.S. recession fears and a sharp position unwind wiped off $6 trillion from global stocks in three weeks.
Investors in 10 major short-volatility ETFs lost $4.1 billion from their peak returns, as bets against volatility turned sour. These trades, popular among retail investors and hedge funds, profited while the VIX remained low but reversed sharply on August 5.
JPMorgan estimated in March that short-volatility ETFs managed roughly $100 billion. Losses extended beyond ETFs, affecting pension and hedge funds trading privately through banks.
The VIX had recovered to around 23 points by Wednesday but remained elevated. Hedge funds and traders continue to face volatility as they adjust to these market shifts.