Certain volatility-linked investment strategies could ramp up selling of equities if turbulence in the stock market, which has been stoked by the U.S. Federal Reserve's hawkish stance on interest rate rises, gets much worse.
"Volatility control funds," systematic investment strategies that take their trading cues from market volatility levels, had been steady buyers of equities since mid-June, when U.S. stocks entered a bear market rally, rebounding 17.4% up until Aug. 16.
But Grinacoff estimates that a pickup in S&P 500 one-month realized volatility to between 35 and 40 could cause these funds to sell around $10 billion over the course of a week. Although that is modest relative to the roughly $35 trillion value of the S&P 500 alone, such funds bear watching. As buyers in rising markets and sellers when stocks tumble, they can often accelerate price swings in either direction, said analysts.
Some market participants might anticipate that these funds will sell and try to sell ahead of them, Barclays equity derivatives strategist Stefano Pascale.History suggests, however, that these funds are a more potent force in falling markets than when stocks are rising.
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