Analysis-Volatility control funds near record equity exposure, raising selloff risk

Volatility control funds have reached record equity exposure levels, potentially raising the risk of a selloff, as reported by Reuters on October 1st. These systematic trading strategies, which typically buy equities during calm market conditions and sell when volatility rises, have become significantly exposed to equities due to the recent stock market rally.

The S&P 500 gained 12% for the year, leading these funds to increase their risk-taking and now hold equity allocations at the 98th percentile, only exceeding this level about 2% of the time since 2010. This elevated exposure leaves them vulnerable to market shocks, as even a modest rise in volatility could force these funds to sell billions of dollars' worth of shares, exacerbating any potential selloff.