By Saqib Iqbal Ahmed
NEW YORK (Reuters) – A sharp drop in U.S. stocks is triggering selling in volatility-sensitive stocks, deepening a selloff that has already sent the Nasdaq Composite into correction territory.
Volatility control funds – systematic investment strategies that typically buy stocks when markets are calm and sell when markets become turbulent – ​​have piled into stocks as indexes hit record highs in 2024.
More recently, they have started selling as investors worry about the economy and tech sector profits. Volatility-control funds have dumped about $83.6 billion in U.S. equity futures over the past two weeks, according to Charlie McElligott, managing director of Cross-Asset Strategy at Nomura.
McElligott said it was “extremely rare” for funds to sell on that scale, noting that they had seen a sharper cut in their equity allocations 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 deepened on Friday after weaker-than-expected U.S. jobs data stoked recession fears. The S&P 500 has fallen about 5% from its record high set on July 16, while the tech-heavy Nasdaq Composite Index has fallen about 10% from a record high hit last month, putting it on track to confirm a correction.
The Cboe Volatility Index is at its highest level in more than 16 months.
According to McElligott, the future behavior of the funds depends on how volatile the markets are in the coming weeks.
A 1% daily change in the S&P 500 over the next two weeks could trigger another $15 billion in selling over that period, while daily changes of 0.5% would stop the bleeding and allow these funds to attract about $14 billion in buyers, McElligott said.
Certain other, slower-reacting strategies that are sensitive to volatility could also join the selling if the market sell-off worsens.
Stocks trend-following commodity trading advisors (CTAs) sold only about $12.5 billion over the past two weeks. But these systematic, rules-based investing strategies could boost selling to about $36.0 billion if the S&P 500 sells off another 4% over the next two weeks, McElligott said.
(Reporting by Saqib Iqbal Ahmed; Editing by Ira Iosebashvili and Nick Zieminski)
