By Saqib Iqbal Ahmed
NEW YORK (Reuters) – A sharp decline in U.S. stocks is triggering selling from volatility-sensitive funds, exacerbating a sell-off that has already pushed the Nasdaq Composite into correction territory.
Volatility control funds – systematic investment strategies that typically buy stocks when markets are calm and sell when they turn turbulent – have loaded up on stocks as indexes soared to record highs in 2024.
More recently, they’ve started selling as concerns about the economy and tech earnings roil investors: Volatility control funds have dumped about $83.6 billion in U.S. stock futures in the past two weeks, according to Charlie McElligott, managing director of Cross -Asset Strategy at Nomura. .
It is “extremely rare” for the funds to be sold at that size, McElligott said. He notes that they have recorded a sharper decline in their equity allocation only 3.2% of the time over the past decade.
The moves come against the backdrop of a sell-off in U.S. stocks that fell on Friday after weaker-than-expected U.S. employment data fueled fears of a recession. The S&P 500 is down about 5% from its July 16 record high, while the tech-heavy Nasdaq Composite Index is down about 10% from last month’s record high, putting it on track for a correction to confirm.
The Cboe Volatility Index is at its highest level in more than sixteen months.
The funds’ future behavior depends on how volatile the markets will be in the coming weeks, McElligott said.
A daily change of 1% in the S&P 500 over the next two weeks could spur another $15 billion in sales over that period, while daily changes of 0.5% would stop the bleeding and ensure these funds bring in buyers for about $14 billion, McElligott said. .
Certain other slower-reacting volatility-sensitive strategies could also join the sell-off if the market sell-off worsens.
Trend-following commodity trading advisors (CTAs) have only sold about $12.5 billion in the past two weeks. But these systematic, rules-based investment strategies could boost sales to about $36.0 billion if the S&P 500 were to sell off another 4% over the next two weeks, McElligott said.
(Reporting by Saqib Iqbal Ahmed; Editing by Ira Iosebashvili and Nick Zieminski)