When correlation is low, it mechanically holds down index level volatility, even when prices of single stocks are moving sharply. Stock price moves are pulling in different directions and to some extent cancelling each other out.
If today's level of single stock volatility was combined with a historically average correlation between individual stocks and the index, the VIX would be over 30. The 'fear gauge' at those levels has more typically been associated with significant investor unease and is well above the average level so far in 2026 of just 18. Rising correlation usually happens during a market sell-off, when investors want to sell stocks across the board.
There are a number of potential drivers of the recent low correlation. One is the extraordinary concentration of the US stock market. A small number of mega-cap technology companies have generated an unusually large share of index performance. Their fortunes are increasingly tied to the enormous investment cycle around AI. The divide between those the market has judged to be AI winners and losers has echoes of dot-com, when internet stocks surged, to the detriment of other sectors, as investors expected the new technology to cause significant disruption. Although high levels of market concentration are not unusual, when the performance of these high-flying stocks is driven by the same story, any wobble in the positive AI narrative could have a serious impact.
However, this low correlation is not just a difference between technology and non-technology stocks. Correlations are also low between stocks within sectors. Investors have been picking their expected winners and losers of the AI story, and all of this has been forcing index volatility lower. Another driver is the growth of long/short equity funds, a popular hedge fund strategy where traders own one stock and sell another against it, benefiting if prices move their way. Hedge fund capital saw its largest quarterly increase in history in the second quarter of this year, reaching a total of $5.6 trillion, and 2025 was the strongest calendar year for hedge fund investor inflows since 2007. These trades have been contributing to single stock volatility while having little impact at the headline level.
A market where a higher proportion of stocks are moving against the index may appear unsettled, but it also offers opportunities. Today, value can be found in opportunities which have been overlooked in favour of the AI trade. The growth element of the Ruffer portfolio aims to take advantage of this, looking for companies that should benefit in a benign market environment if the narrow focus on AI stocks broadens out.
In a sell-off, the Ruffer portfolio should see gains from its protective assets, including VIX call options, derivatives which make money when index level volatility rises. Low correlations have given us an opportunity to buy this defensive protection at attractive prices, with a strong potential payoff if correlation and index level volatility rise.
