Where has All the Hedging Gone?

The market selloff over the past couple of trading session has been sharp, with the Nasdaq losing 4% and the broader S&P 500 index declining 2.5%. Momentum stocks have faced an even bigger challenge as the IBB bio-tech ETF ((NASDAQ:IBB) lost nearly 19% since reaching its high in late February. With all the selling, it’s strange that the VIX volatility index has remained relatively subdued.

The VIX represents the value of at the money strike prices for calls and puts on the S&P 500 index. Generally during periods of sharp market selloffs, the VIX soars in value as investors clamor for protection against falling stock prices. It appears that investors have found an alternative way to hedge their portfolio’s as the VIX has remained relatively subdued during this market selloff.

Sure the VIX has climbed 15% in the last two trading sessions, but its implied volatility level of 15%, is well below the 21% level reached during February when the market sold off to start 2014. The VIX has reached levels as high at 48% during the last European debt crisis. So the question remains, where has the hedging gone?

It seems that investor has purchased protection in specific sectors as opposed to using the S&P 500 index as a hedging tool. The IBB ETF shows that implied volatility for that ETF has moved to 35%, which is the highest level seen in the past 12-months. The range on implied volatility in the bio-tech sector has a floor near 10% and a peak at 35%.

Momentum stocks like Facebook (NASDAQ:FB) have also seen a sharp spike in implied volatility. Implied volatility on the large social media company has climbed to 70%, which is the highest this stock has seen in the last 12-months.

So although the VIX remains subdued, it seems like investors have switched their hedging to sector specific areas, and have left the VIX for greener pastures.