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The resurgence of volatility that dominated the U.S. stock market in early 2018 has already vanished. And some investors are betting tranquility will continue in equities.

Investors including hedge funds have increased wagers that futures contracts tracking the Cboe Volatility Index will fall. The gauge, dubbed the VIX, measures expectations for equity price swings over the next month.

After much turbulence, the S&P 500 has crept higher and is now up 3.7% this year. Technology companies have powered the benchmark equity gauge higher. Confidence from a strong jobs report last week has started to overshadow the inflation worries and global trade tensions that triggered market tremors earlier.

A quieter equity market has led to net bearish positions by leveraged funds on VIX futures hitting the highest level since late January, Commodity Futures Trading Commission data as of May 29 show. Bearish bets outnumbered bullish ones by a ratio of 1.6 to one, the data show. In other words, leveraged funds–a group the CFTC describes as “typically hedge funds”–are “short” the VIX, wagering it will fall.

The high in net bearish positions marks the resurgence of the popular trade known among Wall Street traders as “short vol”, which got crushed in early February after the VIX recorded its biggest surge in history and major U.S. stock indices entered correction territory.

It’s also a reversal from when hedge funds were “long” the VIX, bullish on volatility and expecting it will go higher during March and April–shortly after the February turbulence led to the collapse of two exchange-traded products that allowed investors to be short vol.

The VIX has retreated in recent days and closed Wednesday at 11.64, a level not reached since January. The VIX and its futures contracts tend to rise when the S&P 500 falls, making a bearish view on the gauge akin to a bullish one on stocks.

Hedge funds clung to a net bearish view on VIX futures for all of 2017 and early 2018 as the short-vol trade minted money, CFTC data show.

The trade is also rearing its head in the world of ETPs. The ProShares Short VIX Short-Term Futures ETF, or SVXY, lured money in June though its assets remain well below a record reached in the month of February.

The fund rose for the fourth straight day on Wednesday, closing at $13.77. It was a winner last year but lost much of its value in early February.

Meanwhile, assets in the ProShares Ultra VIX Short-Term Futures ETF, or UVXY, and the iPath S&P 500 VIX Short-Term Futures ETN, called VXX, have declined, FactSet data show. Shares of the ETPs, which allow investors to be long volatility, are down 45% and 32%, respectively this quarter.

Though the futures and ETP trends signal some renewed interest in the short-vol bet, trading through ETPs and VIX derivatives has fallen off in 2018. Average daily VIX options and futures volumes hit at least a two-year low in May, according to data from Cboe Global Markets, which operates VIX trading.


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