Institutional investors are increasingly betting against volatility in the U.S. stock market, signaling a wave of what many call “irrational exuberance.” Despite ongoing challenges, including tariff tensions and geopolitical upheaval, as well as concerns about U.S. institutions, major indices such as the Nasdaq Composite and the S&P 500 continue to reach all-time highs. Many money managers and large funds are confident the rally will persist, supported by solid earnings and strong market fundamentals.

A noteworthy development is hedge funds shorting volatility, essentially wagering that major market disruptions or unpredictable price swings won’t occur anytime soon. The Cboe Volatility Index (VIX), often dubbed Wall Street’s “fear gauge,” has dropped to year-low levels. Hedge funds have placed net short bets on the VIX at levels unseen since 2022, reflecting high confidence and reduced market fear.

However, history shows caution is warranted. Betting against volatility often precedes spikes in market turbulence and losses. In April, the market saw how underestimating political risks, especially uncertainties linked to policies from the Trump administration on trade, can abruptly spike volatility, as the VIX surged past 50.

Additionally, while investors are encouraged by earnings, they remain sensitive to “Fedspeak” about potential interest rate cuts that hinge on unpredictable economic data. The Federal Reserve’s independence and policy decisions face scrutiny, adding another layer of uncertainty.

With record market valuations, low cash reserves, and growing bets against volatility, many experts warn that these trends may reflect overconfidence. Investors would be wise to remain vigilant and prepared for potential volatility ahead.

End Notes

Source: https://www.thestreet.com/investing/hedge-funds-are-betting-the-markets-will-remain-calm-and-keep-rallying-heres-why-to-worry