With measure of volatility rising has wall street gone too far to bet on low market volatility, hedge funds could be caught on the wrong side of the fence as volatility heats up.
Hedge funds have taken to betting on calm markets, and have done well to do so, however, analysts worry the low market volatility can not be sustained much longer, resulting in a large market sell-off, leaving a large number of investors on the wrong side of the fence having made the same bet.
Peter Atwater, president of Financial Insyghts and adjunct professor at the College of William and Mary said, “The danger I see is when crowded trades like this unwind, you don’t go from just low volatility to just moderate volatility”, based on historical market behavior, “we’re going to see a period of extreme volatility now follow this,” he warns.
Financial institutions, bank executives and traders have all raised concerns that persistently low market volatility signals bad times ahead, U.S. stocks have held near all-time highs, but high-performing technology stocks began to sell off in the last several weeks. Major central banks have also indicated monetary policy may tighten soon, sending sovereign bond yields higher and pressuring stocks.
Increased talk of how so many are on one side of the low volatility trade could signal the wind is changing.
We will wait and see.