Stock Markets Might Calm Down Soon

Stock Markets Might Calm Down Soon

over 3 years ago2 mins

According to a prominent hedge fund manager this week, investors who are hoping to profit from massive post-US election uncertainty have completely jumped the gun 🇺🇸

What does this mean?

Whenever there’s uncertainty in financial markets – in anticipation of, say, a contested election – skittish investors tend to buy and sell assets more quickly than usual, causing their values to rise and fall more dramatically.

That’s volatility, and over the last few weeks, investors have been betting it’ll be high for the foreseeable future. That much was clear when the Volatility Index (VIX) – a key measure showing how fearful investors are about US stock prices – hit 35 on Tuesday, versus a long-run average of 20 📊 But one hedge fund that specializes in volatility-based investments says those investors are wrong: it reckons that as people adjust to – checks notes – the new normal, volatility will actually fall.

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Why should I care?

That opinion isn’t especially unique: some traders are starting to bet on falling volatility too, according to investment bank BNP Paribas 🏦 Just look at the bets they’ve been making via options: the number of so-called “puts” that stand to profit from falling volatility have now outstripped the number of “calls”, which profit from rising volatility. Even a major investment manager has started selling off a certain investment whose value typically rises as markets get more turbulent.

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The pros use futures contracts to bet where the VIX will be at a predefined point, but brokers – knowing losses can mount quickly on assets like those – don’t always let retail investors invest in them. It might be simpler and safer to buy into an exchange-traded fund (ETF) that tracks VIX futures instead 🤔 Just be aware that when those contracts expire, the ETF will reinvest in new, typically more expensive ones – and you’ll probably lose money even if the VIX itself has stayed put.

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