Breezy Quarter for Stocks Masks Biggest Bet on Unrest Since 2012

(Bloomberg) -- In the grip of the biggest first-quarter advance for stocks in two decades, investors pumped billions into products that would pay off if the market calm snapped.

Call it a hedge for the famously unloved rally, or a mistimed bet that the sleepy S&P 500 Index was poised for a shake-up. Whatever the reason, inflows into exchange-traded products that notch gains when the Cboe volatility gauge rises topped $2 billion through the end of March, according to data compiled by Bloomberg. That's the most since the first quarter of 2012.

The allocations contrast with data showing that hedge funds and other speculators are aggressively betting on continued market calm.

“It looks like investors weren't super confident in the rally, so they were buying some insurance,” said Athanasios Psarofagis, an analyst at Bloomberg Intelligence.

While traders in risk assets have been on the right side of markets this year, skepticism is easy to find. It's in the U.S. yield curve, it's in the relentless demand for quality stocks and it's in the under-positioning across major assets.

And still, markets have chugged reliably higher, defying bearish chatter that central banks won't prove volatility killers for much longer as the business cycle ages.

Falling short interest tracking the products suggest the inflows reflect active bets on equity price swings, according to Vinay Viswanathan at Macro Risk Advisors.

“Even as the market caps of long volatility ETPs have increased, short interest has fallen,” said the strategist. “While the volatility complex is multifaceted, all else being equal, this would suggest that the fund flows aren't from short sellers, who would be effectively shorting vol.”

‘Awful Fourth Quarter'

The inflows are a neck-snapping reversal from late 2018, when investors pulled more than $2 billion from products going long the VIX.

“The fourth quarter was awful so people took profits on it,” said Psarofagis.

Still, the stock melt-up has been wearing down the bears in recent sessions -- last week, investors withdrew some $79 million from ETFs that protect against equity price swings, the most this year.

To contact the reporter on this story: Yakob Peterseil in London at ypeterseil@bloomberg.net

To contact the editors responsible for this story: Samuel Potter at spotter33@bloomberg.net, Sid Verma, Cecile Gutscher

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