Volatility-linked investment strategies are joining the nascent sell-off in U.S. stocks and could help accelerate declines if market gyrations keep increasing.
Traders work on the floor as screens display the logo for Chevron Corp. and Hess Corp. at the New York Stock Exchange in New York City, U.S., October 23, 2023. REUTERS/Brendan McDermid/File PhotoVolatility control funds - systematic investment strategies that typically buy equities when markets are calm and sell when they grow turbulent - hoovered up stocks as the S&P 500 marched to record highs this year.
While that is small compared with the S&P 500’s $42 trillion market capitalization, the funds’ tendency to follow market momentum can sometimes exaggerate stock moves, market participants said. Other, slower moving strategies could also join in if volatility increases. One reason that selling from volatility-control funds has not kicked in to higher gear so far is that the declines in the S&P 500 have been relatively measured, Barclays strategists wrote.
A more pronounced jump in volatility could also activate slower-reacting funds that use volatility as a trading signal, including commodity trading advisers and risk parity funds, piling more pressure on the market as they ramped up selling.
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