(April 2, 2013) — Investors are pouring large amounts of assets into funds that track volatility, despite the measure sitting at historical lows, as they expect a surge could be just around the corner.
Global net inflows to exchange-traded products (ETPs) hit $1.18 billion in the first quarter of the year, data monitor Markit announced this morning.
Some $1.37 billion flowed into ETPs that were long volatility indexes, with $191 million being redeemed from ETPs that were short these measures.
“Despite seeing disappointing returns year-to-date, investors have been adding to the assets under management of VIX-tracking funds,” said Simon Colvin, analyst at Markit. “[They] have been pouring funds into ETFs which track the VIX index, a measure of expected volatility in S&P 500 options.”
Current S&P 500 “at the money” options have an implied volatility of 12.9%, Colvin said, which is just slightly off the two-year low of 11.7% seen in mid-February. In October 2011, during the peak of the Eurozone crisis, implied volatility in S&P 500 options hit highs of around 40%.
The NASDAQ and Russell 200 indexes have also seen lows in recent months – therefore funds following all three indices have experienced losses, Markit data showed.
Markit said these investors were adding to these assets for downside protection.
In October, volatility fell to pre-crisis levels and has remained there ever since despite issues over the US fiscal cliff and on-going Eurozone problems. At the time, Melissa Brown, senior director in Applied Research at risk specialist Axioma said: “The macro issues we are seeing in the headlines could already be baked into stock prices, and for that reason volatility has remained subdued. Or, the extreme uncertainty in current markets may have simply paralyzed investors, which would also have had a dampening effect on volatility. More ominously, this could also be the calm before the storm.”
As investors have taken to markets to buy up protection, they may fear the storm is about to break.