Retail Investors are Worried - High VIX Exposure

Retail investors appear increasingly cautious, with their net positioning on VIX futures now two standard deviations above the trailing mean, totalling $91 million in exposure (98th percentile). Interestingly, this week, their largest net purchase was in S&P 500 futures, with $5 billion added, bringing their month-over-month exposure increase in the index to $7.8 billion. Conversely, their most significant sell activity was in U.S. 2-Year Treasuries, where they offloaded 17,321 contracts, amounting to a total of $3.5 billion.

We interpret this positioning as an indicator that retail investors, on average, may be anticipating a Trump victory. They likely expect stocks to perform well, inflationary pressures to rise—potentially driving bond yields higher—and volatility to remain elevated in response. This positioning underscores their view of a favourable outlook for equities amid a heightened inflationary environment, with elevated yields and continued market uncertainty.

Asset Managers:

This week, asset managers saw the largest decrease in net exposure in the S&P 500 (-20,435 contracts), while their most significant increase was in USD/JPY (+12,791 contracts). As illustrated in the above chart, asset managers continue to hold an above trailing twelve-month (TTM) average position in the S&P 500; however, this exposure has gradually moderated in recent months. Conversely, their exposure to USD/JPY has mean-reverted from extreme bearish levels. Since October, they have bought a net total of 59,295 contracts, effectively selling 741 billion yen to purchase approximately $4.8 billion at current market prices. This change in positioning could also be related to the higher implied probability of a Trump win. This would certainly be bullish for the USD.

It is also worth noting that asset managers have been actively accumulating VIX futures over the past three months, adding 43,513 contracts. Their current exposure now sits at more than two standard deviations above the trailing mean, highlighting a strong positioning in anticipation of potential volatility. In contrast, hedge funds have been steadily reducing their VIX futures exposure, taking a more bearish view on volatility.

Additionally, asset managers, along with retail investors, have increased their Bitcoin exposure by $180 million, positioning themselves to benefit from the ongoing price momentum. Hedge funds, however, continue to trim their positions, taking a contrarian approach amid the rally. Despite this accumulation, asset managers maintain a cautious outlook, with their overall Bitcoin positioning still more than one standard deviation below the trailing twelve-month (TTM) mean, signalling a restrained, relatively bearish stance.

Hedge Funds:

This week, hedge funds significantly increased their net positioning in USD/CAD by 16,843 contracts, while reducing their exposure to U.S. 2-year Treasuries by 62,338 contracts. 

Notably, USD/CAD has become a crowded trade, with all reported investors holding positions above the 80th percentile relative to the trailing twelve-month (TTM) average. The pair is currently trading at a TTM high. Given this extreme bullish positioning, a price reversal could be exacerbated as long positions are unwound. We believe a potential catalyst for such a reversal is the market adjusting to a higher probability of a Harris victory in the upcoming U.S. presidential election.

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Disclaimer:

Past performance does not guarantee future results, which may vary. The economic and market forecasts presented herein are for informational purposes as of the date of this presentation. There can be no assurance that the forecasts will be achieved. Copyright Alpha Rho Technologies LLC. All rights reserved.