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Hedge funds are ‘dancing on the rim of a volcano’

SocGen says hedge funds
shorting the VIX are “dancing on the rim of a
Reuters / Stringer

The marketplace is calm. Perhaps too calm.

The lack of charge swings has traders mired in a sea of
complacency, which has them ignoring doable dangers, says
Societe Generale.

The company in particular cites the CBOE Volatility Index — or VIX —
which is used to trace anxiety in the US inventory marketplace.

Not handiest is the so-called concern gauge locked close to the lowest
ranges on document, however hedge funds are making a bet it is going to decline even
additional. Their VIX positioning is the maximum bearish on document,
consistent with knowledge compiled by means of the US Commodity Futures Trading

“Compare that with dancing on the rim of a volcano,” a workforce of
SocGen strategists led by means of Alain Bokobza, the company’s head of
world asset allocation, wrote in a consumer notice. “If there’s a
unexpected eruption (of volatility) you get badly burned.”

positioning for hedge funds and massive speculators is the maximum
bearish on document.

This is not the first time SocGen has issued a caution about low
volatility. Two weeks in the past, the company drew parallels to
stipulations main as much as the 2007 monetary disaster.

Describing the present state of affairs as a “bad volatility
regime,” the company cited the robust mean-reverting tendency of
charge swings as a giant explanation why traders will have to be bracing

Other heavyweights in the funding box have additionally spoken out
about the low-price-swing state of affairs that they see as untenable.
In past due July, JPMorgan world head of quantitative and
derivatives technique Marko Kolanovic when put next rock-bottom
volatility to the stipulations main up
to the 1987 inventory marketplace crash.

In a fresh interview with Business Insider, Laszlo
Birinyi, the funding guru who predicted the bull marketplace and
has been again and again proper over its eight 1/2-year run, stated that
making a bet on the VIX is a “fast method to lose

But it sounds as if buyers have not begun to concentrate. In fresh months,
they have got endured to pile into bets that
markets will proceed to sit down nonetheless, whilst viral stories of large
income made shorting volatility have most probably impressed
copycats fearful to make a fast greenback.

And whilst many professionals are fast to warn towards low volatility,
there is not any extensive consensus round what is going to shake the marketplace out
of its shut eye. Complacency certainly.


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