Hedge funds are "fiercely" shorting "U.S. stock volatility," and the precedents of "February this year and July last year" are not looking good!
CFTC data shows that hedge funds' net short positions in VIX futures have risen to a three-year high. This extreme shorting of VIX was previously seen in February this year and July 2024: In February, investors were concerned that Trump's global trade war would impact financial markets and trigger an economic recession, leading to a sharp increase in volatility that caught traders off guard. In July last year, traders also shorted VIX to extreme levels, followed by a massive unwinding of yen carry trades in August that shocked global markets
Hedge funds are aggressively shorting the Chicago Board Options Exchange Volatility Index (VIX), betting on a calm market. Historical data shows that this often signals greater volatility ahead.
According to data from the Commodity Futures Trading Commission (CFTC), as of the week ending August 19, hedge funds and large speculators held a net short position of approximately 92,786 contracts in VIX futures, a level not seen since September 2022.
Chris Murphy, co-head of derivatives strategy at Susquehanna, stated that the aggressive bearish bets on VIX either reflect market confidence or expose investor complacency. He warned:
"This is a situation that needs to be closely monitored; if volatility unexpectedly spikes, traders will inevitably be forced to cover their positions."
Murphy noted that while the economy has performed well under tariff shocks, bets against volatility are increasing. However, traders were forced to close out wrong-way positions earlier this year due to trade concerns.
In February of this year, after the S&P 500 index peaked, fears that Trump's global trade war could impact financial markets and trigger an economic recession intensified, leading to a sharp rise in volatility. This concern caught traders off guard as they had bet on low volatility at the beginning of 2025.
It is noteworthy that a similar extreme shorting of VIX occurred in July last year, followed by a closure of yen carry trades that disrupted global markets in August.
These historical lessons indicate that when market participants overly bet on low volatility, they are often vulnerable to unexpected shocks
