One of Wall Street’s hottest hedge fund strategies – the dispersion trade which profits when index volatility remains subdued while single-stock volatility rises – is showing signs of crowding, prompting some managers to take the other side, according to a report by Bloomberg.

With the S&P 500 grinding higher in a tight range and the VIX anchored below 20 since June, many pod shops have leaned into the trade. But the growing imbalance between expensive single-stock options and relatively cheap index volatility is narrowing returns.

Benn Eifert, managing partner and co-CIO at QVR Advisors, has turned contrarian. “There are massive dispersion trades by big pod shops,” he said. “We do have the reverse dispersion trade on: We’re long index vol, short single name vol.”

While conditions can persist — as BNP Paribas strategist Greg Boutle notes, low-volatility regimes lasted for 18 months before 2018’s “Volmageddon” — some managers see risk in crowding. Eifert acknowledges his reverse position carries idiosyncratic risk if single-name stocks spike, citing recent sharp moves in Oracle and Intel.

Others remain unconvinced. RBC’s Amy Wu Silverman said investors remain wary after April’s tariff-fueled rally, while Barclays’ Alex Altmann argued that betting against equities now “is a terrible moment to short stocks,” preferring to use low volatility to buy calls.

Fund managers are also experimenting with custom volatility baskets. Barclays’ Stefano Pascale has suggested dispersion trades focused on meme or smaller-cap stocks flagged by the bank’s Equity Euphoria Indicator, a way to avoid the heavy concentration in Tesla, Nvidia, and other mega-caps.