Increasingly frequent spikes in the VIX volatility index could offer hedge funds and other investment managers strong return opportunities amid the resulting equity market gyrations, new analysis published by Man Group suggests.
Increasingly frequent spikes in the VIX volatility index could offer hedge funds and other investment managers strong return opportunities amid the resulting equity market gyrations, new analysis published by Man Group suggests.
Probing various trends emerging from the biggest VIX surges over the past 30 years, Man’s ‘Views From The Floor’ commentary noted that four of the top 10 spikes have occurred since the Covid-19 pandemic. At the end of last month, the volatility index soared by some 11 points – a 10-month high – as a result of growing fears over the emerging Omicron Covid-19 variant.
The note, which explored the merits of investors buying into a VIX spike, observed that if the S&P 500 is up in the week after the VIX spike, history shows most forward returns come during that first week – generating a median return of 1.4 per cent.
“As time goes on, returns drop, persisting into the second week less than half of the time,” noted Ed Cole, managing director, discretionary investments at Man GLG, adding that while the average return in the second week is negative, although this improves over a 3-month basis.
“However, the pattern reverses if the S&P 500 declines in the week after the VIX spike, as we saw between 29 November and 3 December. In this instance, returns persistence after the second week improves to 86 per cent, and is 100 per cent after three months. Mean and median returns are both positive, across all of our time periods, and the 3-month average return is about 6.4 per cent higher than the ‘up after one week’ scenario.”
Tuesday’s note observed how, prior to the four major Covid-related volatility spikes, the VIX had surged during the Dotcom Bubble (2001), the Global Financial Crisis (2008), the Asian crisis (1997), the Flash Crash (2010), and the Renminbi Devaluation (2015).
It added: “While it probably isn’t news that the pandemic has made markets more volatile, Covid-related sell-offs have occurred so frequently that, occasionally, we forget just how rare big moves in the VIX used to be.”
