European stocks rise on hopes of Draghi bond buys, China stimulus

Despite the recent strong gains, investors pulled over $1 billion out of Europe equity funds in the last week of August, according to EPFR Global, a research firm which tracks both traditional and alternative funds globally.

EPFR also signals a strong rise in investors' appetite for hedges, as investors move to protect their portfolios.

RISING RISK AVERSION

"With volatility so low and recent portfolio gains to protect, investors have been buying volatility funds in recent weeks amounting to about $1 billion of inflows," EPFR Global Managing Director Brad Durham wrote in a note.

"The bets are paying off as the VIX gapped higher during the last two weeks of August."

Reflecting a similar trend in Europe, the Euro STOXX 50 volatility index, Europe's main gauge of equity market investor anxiety, surged 3.7 percent on Monday.

The volatility index and the Euro STOXX 50 usually move in opposite directions, but the VSTOXX has gained more than 25 percent over the past two weeks while the Euro STOXX 50 is only down 1.3 percent over the same period, signalling a rise in investors' risk aversion despite any significant pull-backs in stocks.

"(The volatility index) is bouncing from what was quite a low level hit in July, but that being said, its recent rise is a sign that a lot of investors are bracing for a market correction. It bodes ill for equities in the next few weeks," a London-based volatility and derivatives trader said.

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