SocGen researchers say that the great volatility short may be at an end. Stock volatility, measured by the VIX, has dropped remarkably since the end of the financial crisis, and hedge funds have made oodles of money shorting the index and related ETFs. Meanwhile, companies have had a great opportunity to issue shares into the rising stock market.
The VIX isn’t a perfect reflection of stock volatility since it tracks short term futures on the S&P 500. Since those futures are normally in contango, rolling them forward is a sure way to lose money, and so the index under normal conditions has a technical reason why it tends to fall over time.
That makes a short position a no-brainer. But SocGen says that net short positions on the VIX peaked last August and were mostly unwound by the beginning of Fed tapering in December. That indicates the hedge funds are worried about some sort of jump risk, say, if the index were to spike on geopolitical news or a market correction.
If that happens, it will be bad news for companies looking to issue stock. But since most companies are doing the exact opposite – even at today’s inflated multiples – those looking to buy back stock at a more reasonable price have a reason to be cheerful.