Wall Street's famous “fear indicator” is not what it once was as funds shrug off the VIX surge

August was a turbulent month for the markets. One only has to look at the CBOE Volatility Index (or VIX), a measure of volatility popularly known as Wall Street's “fear barometer,” which spiked at the height of the crisis earlier this month. On August 5, the volatility index peaked at over 65, its highest level since the start of the COVID-19 pandemic and a level that has only been reached a few times this century.

However, the VIX soon recovered at record speed, plunging over 50 points in a matter of weeks as markets recovered their losses. The index currently stands at around 17, below its long-term average of 20, which is traditionally interpreted as a sign that investors are relatively calm.

But the large fluctuations in the index, said several experts, Assets, serve as proof that the VIX no longer means what it once meant.

“It's kind of a measure of fear,” said Benjamin Bowler, head of Bank of America's global equity derivatives research team. “But maybe it's not the same level of fear that people generally think.”

Check out this interactive chart on Fortune.com

The CBOE Volatility Index is derived from call and put options on the S&P 500; these are currently standard options that expire on the third Friday of each month and weekly options that expire on all other Fridays. Using these derivatives, the index measures the expected price fluctuations, or volatility, of these options over the next 30 days.

This ties the VIX to a specific date, says Michael Green, portfolio manager and chief strategist at ETF manager Simplify, making the index less useful as a general indicator of market sentiment. In addition, the derivatives that make up the VIX are not traded as frequently as they once were, with investors increasingly favoring one-day and zero-day options to limit their risk.

“Part of what you saw in this fantastic Spike [of the VIX] “It was basically the pain you feel after your first workout,” Green said. “It hadn't been used in a while.”

Bowler explained that recession fears, the unwinding of the yen carry trade and other commonly cited reasons for the market collapse were the triggers for the VIX spike in early August. But he said the jump was exacerbated by the illiquidity of the S&P options that make up the index. The widening of the bid-ask spreads of those options – the difference between the highest price a buyer is willing to pay and the lowest price a seller would accept – caused the VIX to overstate investor uncertainty.

“A VIX of 65 may not be the same as a VIX of 65 ten years ago, when liquidity was not as volatile as it is today,” Bowler said.

The story continues

Quantitative funds want to buy back $190 billion after VIX fears

But that didn't stop so-called systematic funds, which trade based on market signals such as volatility rather than fundamentals, from selling stocks en masse. Last month, these funds sold the largest dollar volume of stocks in four years, Bloomberg reported, cutting their equity allocation by more than half.

Typically, these quant funds, as they are also called, sell quickly but take longer to rebuild their positions. This time, however, some believe the funds will rebalance with greater urgency following the rapid rise and fall in volatility.

Among those who agree is Green, the portfolio manager at Simplify. If quantitative funds look to ride the rally, it could become a self-fulfilling prophecy, he says.

“More and more people are realizing the value of the buy-the-dip approach,” he said, “which in turn means they are more willing to step in and program their models to respond more quickly to these types of dynamics.”

This move away from major passive players could result in about $190 billion flowing back into the market over the next three months, Bloomberg reported, assuming modest daily gains for the S&P.

Regardless, a wealth of research cautions retail investors against trying to time the market right. Many activist managers, meanwhile, see opportunities by thinking long-term and focusing on company fundamentals.

“As Warren Buffett said, it is usually best to buy when others are fearful and sell when others are greedy,” Eric Beyrich, equity portfolio manager at Florida-based investment firm Sound Income Strategies, wrote in an email to Assets“A high VIX, especially if it appears to be due to a temporary factor, can indicate a good time to buy.”

In this case, uncertainty could also mean an opportunity.

This story originally appeared on Fortune.com