Hedge funds are shifting investments to safe havens in risk averse moves that reveal there is still widespread trepidation about the long-term stability of the U.S. economy.
Hedge funds are pouring money back into the Chicago Boards Options Exchange Volatility Index (VIX), which is the primary gauge of expected market turmoil. The VIX dropped 31 percent through Monday, marking its biggest decline since October, reports Business Insider.
U.S. stocks rolled into Monday on the heels of a five-day rally following their abysmal start to 2016, sending optimistic investors back into the market. The rally appears to have been overdone, however, with stocks pulling back Tuesday and continuing their decline Wednesday. The VIX recovered roughly 14 percent over trading Tuesday and Wednesday, showing that the big players are not sold on the idea that the economy is stable.
“Hedge fund positions bear all the imprints of significant risk aversion already,” strategists at multinational investment firm Societe Generale said in a research note Wednesday. “The volatile start of 2016 forced hedge funds to adopt a very cautious stance.”
Overall hedge funds are currently heavily invested in the VIX index and 30 year treasury bond. Funds are also shorting the S&P 500 and Nasdaq stock indexes, meaning major hedge funds are betting against growth, at least for now, reports Bloomberg.
“There’s a contingent out there that believes the VIX has come down too hard, too fast,” Dan Deming, manager at KKM Financial told Bloomberg. “For those looking for a quick turn, getting long VIX ahead of a short-term momentum shift is an easy way to get exposure to the volatility space.”
Markets proved that they are still open to international headwinds and external economic influences Tuesday, as a drop in oil put the brakes on the six-day stock rally. Some industry experts think all the negativity is overblown, and that market turbulence is a factor of investor sentiment rather than long-term economic fundamentals.
“The negative sentiment numbers are just absurdly overwhelming,” Andrew Brenner of National Alliance Capital Markets told Bloomberg. “There’s no conviction. The nervousness of the market is still out there.”
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