Hedging Always Comes at a Price
September 4, 2025
On August 28, 2025, the S&P 500 Index closed above 6,500 for the first time, marking a gain of more than 30% from its April 2025 low.1 Despite the strong rally, investors are increasingly focused on preserving these gains and hedging against potential equity market pullbacks. Traditionally, put options were the go-to hedge. However, more recently, investors appear to be flocking to Chicago Board Options Exchange Volatility Index (VIX) futures as an alternative.
Long VIX futures exchange-traded funds (ETFs)/exchange-traded notes (ETNs) have surged in inflows. For instance, shares outstanding of the ProShares VIX Short-Term Futures ETF (VIXY) jumped from under two million in May to nearly 10 million as of August 29, 2025. The mechanism behind these products is straightforward: they gain exposure by holding long VIX future contracts, and their net asset value rises if equity volatility spikes. The key difference across the family of long VIX futures ETFs/ETNs is leverage, which can range from 0.5x to 2x.
When an investor buys a put option, the entire premium is lost if the market doesn’t decline. The longer the hedge period, the more costly the option premium becomes. By contrast, the appeal of using VIX exposure is that the index is perceived to have a “floor” at low levels. In today’s environment, this creates the impression that the downside risk of holding long VIX positions is limited, making the trade appear more attractive than traditional options.
The reality, however, is more nuanced. The catch lies in the premium of VIX futures over the VIX index. Since the VIX index is not tradable, futures are the nearest proxy. In today’s environment, VIX futures trade at a notable premium to the index. As futures approach maturity, they converge downward to the VIX index level, meaning long VIX futures positions inherently bleed value over time — even if the VIX index doesn’t move.
As today’s Chart of the Week highlights, this premium has widened as inflows pour into long VIX futures ETFs/ETNs. The spread between the second-month VIX futures and the VIX index has recently reached its widest level since early 2023.2 Conversely, ETFs/ETNs that short VIX futures — such as the ProShares Short VIX Short-Term Futures ETF (SVXY) — have seen significant outflows. This shift in flows tilts the supply-demand balance of VIX futures, embedding a rich risk premium into the contracts.
Key Takeaway
As investors search for more efficient ways to hedge their portfolios, long VIX futures have gained increasing traction. Compared to put options, the strategy may offer certain advantages, notably, stronger performance during sharp equity market pullbacks. However, investors must recognize the inherent costs in different hedging approaches. As demand for long VIX futures rises, so does the embedded risk premium investors pay. According to Bloomberg, hedge funds have been positioning on the opposite side of this trade to harvest the premium.3 In financial markets, there is no such thing as free hedging.
Sources:
1-3Bloomberg
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