Volatility-targeting funds could sell $225b of stocks

JPMorgan strategists see $100b in US equity outflows from systematic strategies

The turmoil in global equities has spurred a wave of deleveraging among volatility-targeting funds that’s set to unleash $225 billion of equity sales in the coming days, according to Barclays Plc.

Some $500 billion of assets are tied to funds that target a given level of volatility — twothirds of which are traded by algorithms that look poised to divest after Monday’s eruption of turbulence, according to the British bank. Volatilitytargeting investment strategies have become popular in recent years, spurred by the market calm and equity bull run.

“As market sell-offs and expected volatility increase, these funds decrease their leverage to equities,” strategists led by Maneesh Deshpande wrote in a note yesterday. Although the specific inputs aren’t known and differ between managers, the leverage taken by quantitative funds in the run-up to the global sell-off “was likely quite high given the low levels of volatility.”

Volatility-control funds with a 12 per cent target, 30 per cent exposure to bonds and a variable allocation to US stocks would be selling equity futures totalling 15 per cent of their assets, according to Goldman Sachs Group Inc. research. That “may pressure equities in the coming days, though these flows can be offset by corporate buy-backs and fundamental investors,” strategists led by John Marshall wrote yesterday.

JPMorgan strategists see $100 billion in US equity outflows from systematic strategies.