Last Wednesday was another good day to make money on Wall Street: Stocks pushed up, interest rates were at rock bottom and the VIX gauge of investor unease was again trending downward.
But as investors celebrated yet another bounce-back from a market slip, Christopher Cole, a trader who runs a hedge fund here that makes bets on various forms of financial apocalypse, spotted something amid the sprawl of data and code that decorated the wall of screens before him.
“Optically, volatility is still very low, but fear is increasing,” Mr. Cole said, pulling up a chart on one of his six trading windows. It showed that in the months beyond the 30-day period measured by the Chicago Board Options Exchange’s VIX index, investors were expecting some violent moves to come in the stock market.
Betting against a flare-up of such turmoil has been one of the longest-running and most profitable trades in recent financial history.
Mr. Cole, who opened Artemis Capital to outside investors in 2012, is taking the opposite side, arguing with the passionate intensity of the true believerthat this market calm cannot last.
In doing so, he draws parallels to the stock market crash of 1987, when investors were similarly lulled into believing that volatility would not erupt.
So far, those betting against chaos have carried the day.
From day traders perched in front of their living room laptops to sophisticated institutional investors the world over, many have made piles of money betting that the VIX will keep moving lower.
After peaking at close to 90 at the time of the financial crisis, the VIX recently sank to a multidecade low of just below 9, the occasional sharp spike upward notwithstanding. (As of Wednesday afternoon, it was 10.5.)
Several factors have helped along the way, analysts say. They include aggressive money printing and bond purchasing by global central banks and the profusion of exchange traded investments, which make it cheap and easy for professionals and amateurs alike to bet on a falling VIX.
Now, just a month ahead of the 30th anniversary of Black Monday, when the Standard & Poor’s 500 stock index plunged 20 percent, Mr. Cole is wagering on a similar calamity, underpinned by a vicious spike in the VIX and a steep sell-off in stocks.
“The fact that everyone has been incentivized to be short volatility has set up this reflexive stability — a false peace,” he said. “But if we have some sort of shock to the system, all these self-reflexive elements reverse in the other direction and become destabilizing as opposed to stabilizing.”
Calling an end to the second-longest bull market in modern financial history has, understandably, become quite fashionable. Not just on the perma bear fringes, either. Wall Street houses talk regularly about overvalued stock markets, and establishment voices like Lloyd C. Blankfein, the chief executive of Goldman Sachs, have mused openly that “things have been going up for too long.”
A little-known British investment firm, Ruffer Capital, has caused a stir by predicting a shattering denouement, and many hedge funds are buying up cheap VIX options, which will pay off handsomely if the index shoots up.
Chris Cole, Founder and CIO of Artemis Capital Management is one of the pre-eminent managers of volatility and he brings great insight and clarity to volatility as an investment strategy and the benefit of a bias towards convexity in the portfolio. With tail risk compressed and pushed out into the future, Chris questions the wisdom of an industry that is collectively short volatility on a major scale.
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