As the US stock market reeled from a massive tech sell-off on Monday, one hedge fund strategy emerged as a clear winner – dispersion trades – a popular options bet that thrives on low correlation between individual stocks and the broader market, according to a report by Bloomberg.
The dispersion trade, which involves buying options on single stocks while selling contracts on an index, posted its best day since 2020, with the DeepSeek-driven tech-turmoil sending major AI names tumbling while the overall market remained relatively stable.
On Monday, Nvidia and Broadcom both plunged 17%, yet the S&P 500 fell just 1.5%, and the Cboe Volatility Index (VIX) edged up by only three points. This stark divergence fuelled gains for dispersion traders, who rely on the assumption that index volatility will be lower than that of its individual components.
“Correlations across stocks are even lower than they were last week,” said Michael Purves, CEO of Tallbacken Capital Advisors, in a note. “This explains why the move in the VIX is tepid.”
Once a niche hedge fund play, dispersion trading has gone mainstream as banks like JPMorgan Chase, Citigroup, and BNP Paribas have packaged the strategy into swaps for broader client access. On Monday, these versions of the trade saw their best performance in nearly five years, and the Cboe S&P 500 Dispersion Index surged the most since 2022.
Despite concerns that dispersion has become overcrowded, Monday’s performance reinforced its defensive appeal. Some analysts argue that lower correlation is now a structural market feature, as tech megacaps behave independently from the rest of the S&P 500.
“These companies have a life of their own, very different from the other 493 companies in the S&P,” said Xavier Folleas, Global Head of QIS at BNP Paribas.
Monday’s tech rout also boosted other quantitative trading strategies, particularly those that favour stable, low-volatility stocks over riskier names. A Dow Jones index tracking this approach saw its biggest jump since 2020, while another strategy focused on undervalued stocks posted its largest gain in seven weeks.
