Volatility-driven investors, the biggest sellers of US equities in March, may be close to exhausting the sharpest phase of their risk reduction, according to Nomura.
The bank said systematic strategies tied to realised volatility, including commodity trading advisers and volatility-control funds, had already cut a large amount of equity exposure during the recent bout of market turbulence.
If volatility now starts to ease, those same investors could shift from a source of pressure on stocks to a modest source of support.
Selling pressure begins to fade
Nomura said markets may have entered what it described as a neutral zone after the heavy selling seen in March.
That suggests the most aggressive phase of de-risking may already be over, even if positioning remains cautious and vulnerable to another shock.
The key point is that exposure has already been taken down sharply.
With many systematic investors now running equity allocations below historical averages, the scope for a further wave of forced selling may be smaller than many investors assume.
That does not eliminate downside risk, but it does change the balance of probabilities if market conditions stabilise.
Nomura estimates that volatility-control strategies, CTA-style funds and related products now represent well over [MONEY value=”1000000000000″ currency=”usd” notation=”long” replace=”false”] in assets, making them an important swing factor for short-term market flows.
While these strategies remain smaller than the traditional long-only universe in headline terms, their tendency to adjust exposure rapidly means they can have an outsized impact during periods of stress.
Volatility still drives the trade
The central variable remains realised volatility, which measures how much the market has actually moved over a recent period rather than how much investors expect it to move next.
As long as realised volatility stays elevated, systematic strategies are likely to remain defensive and keep equity exposure light.
That helps explain why flows have been so negative in recent weeks.
Volatility in the S&P 500 has remained high, reflecting investor unease over the conflict between the US and Iran, the jump in oil prices and broader uncertainty over the macro outlook.
One widely watched volatility gauge, the CBOE S&P 500 3-Month Volatility Index, stood at 24.77 on April 6, indicating that market stress remained elevated even after some recent moderation.
Nomura said systematic exposure to equities is now about 5% below its historical average.
In practical terms, that means investors have already removed a meaningful amount of risk and may not need to keep selling at the same pace unless volatility rises again.
A possible turn in flows
Assuming current conditions hold and volatility continues to drift lower, Nomura estimates that the three main systematic cohorts it tracks could become net buyers of roughly [MONEY value=”20000000000″ currency=”usd” notation=”long” replace=”false”] equities by early May.
That would mark a notable reversal from March, when these investors acted as a significant headwind for the market.
The buying case, however, is conditional rather than assured.
A fresh spike in volatility could still trigger another round of sales, with Nomura estimating that an abrupt rise in market swings might lead to roughly [MONEY value=”48000000000″ currency=”usd” notation=”long” replace=”false”] of additional equity selling by the end of April.
That leaves investors with a fairly straightforward near-term framework.
If realised volatility falls, systematic flows should become less hostile and may begin to support the market.
If volatility rises again, the de-risking cycle could quickly restart.
What to watch
For now, the message from Nomura is that the steepest part of the systematic selling cycle may be behind the market.
The next few weeks will depend less on valuation or earnings and more on whether volatility keeps easing.
That makes the path of market swings more important than ever. If calm returns, volatility-linked funds could turn into incremental buyers of US equities.
If not, the market may yet have to absorb another wave of mechanical selling before conditions truly stabilise.
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