Low-volatility trades accelerate selloffs in global equity markets

ET Intelligence group: The long-awaited return of volatility has finally jolted global equity markets following concerns over hardening bond yields that often lead to higher inflation and slower economic growth. The CBOE VIX, a gauge of fear in the market, has shot up to 39, the highest level since August 2015. It was at a decade- low before the current fall in equities began. Developed equity markets have lost $8 trillion in three days.

Since 1990, the CBOE VIX averaged at 19.3. In the past three years, it was below 13. Historically, the VIX trades inversely to benchmark S&P 500 index for nearly 80 per cent of the time. In addition, the ratio of enterprise value and operating profit in the MSCI World index to VIX — known as complacency index — reached a two-decade high during the period.

The current sharp fall in global equities has exacerbated due to the unwinding of trend following strategies or low-volatility trades. Trend following strategies include index-option gamma hedging, short volatility trades and volatility targeting strategies. The exchange-traded fund tied to short volatility — a bet against equity turbulence — reached nearly $3 billion. JPMorgan in a note said the unwinding of low-volatility trades would probably lead to $100 billion of outflows from the US markets.


Indian markets too faced the heat of the global selloff and the benchmark Nifty dropped close to 100-day moving average (DMA). Volatility in the Indian market reached to the highest level since August 2015.