As volatility intensifies, quantitative funds withdraw from U.S. stocks and rush into safe-haven assets

The Tongce Financial APP has noticed that recent waves of volatility sweeping through the U.S. stock market have led some quantitative investment management firms to completely liquidate their stock holdings and shift into low-risk assets.

This shift reflects a broader rebalancing trend among systematic investors. These investors rely on quantitative signals rather than fundamental analysis, using data and model-driven allocation strategies to mechanically increase exposure during sustained upward trends and cut risk when volatility intensifies or trends weaken.

As investors weigh the threats and opportunities brought by AI, while also considering geopolitical tensions and trade policy uncertainties, the S&P 500 has experienced turbulence in recent months. This month, the index’s intraday average volatility reached 1.2%, the highest since November last year; actual volatility is also at its highest level since December.

This intense volatility forced trend-following investment firm McElhenny Sheffield Capital Management to reduce its stock allocation to zero on February 6.

The firm shifted into relatively safe and stable risk-off assets such as gold and U.S. Treasuries. Its model relies on price, market breadth data, and relative strength indicators, which show that the stock market is unlikely to sustain a prolonged upward trend, prompting it to abandon chasing excess returns and adopt capital preservation strategies.

Grant Morris, the firm’s portfolio manager and COO, said, “When the market hits our risk management levels, we switch fully to defensive mode. We only allocate to U.S. stocks if there is evidence of an upward trend. If not, we exit completely.”

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McElhenny Sheffield Capital Management’s complete liquidation of stocks may seem extreme, but it aligns with the reallocation trend among commodity trading advisor (CTA) funds. According to Barclays, these funds, which rely on mathematical models for investment decisions, have reduced their U.S. stock exposure to around the 50th percentile.

Barclays derivatives strategist Stefano Pascal wrote, “Since tech stocks remain the most vulnerable sector in the U.S., allocations may decrease further. Even if prices stay flat in the coming days, CTAs might continue to sell and possibly switch to short positions.”

Technology stocks led the latest volatility on Wall Street on Thursday. Nvidia once fell 5.8%, dragging the Nasdaq 100 index down more than 2%. However, the index recovered somewhat later in the session, closing down 1.2%.

After months of steady gains, the stock market is showing signs of fatigue. Currently, choppy price movements, weakening internal market indicators, and sharp intraday swings have eroded many trend signals relied upon by models. Breadth indicators (such as the ratio of advancing to declining stocks and new highs versus new lows) are now being considered alongside momentum and trend signals.

This kind of quant model setup could exacerbate market volatility, especially on the downside.

Goldman Sachs data shows that since the start of the month, systemic strategies have turned negative on U.S. stocks. In a report on Wednesday, Goldman traders noted a surge in demand for downside protection in recent weeks. According to estimates from trading desks, if the market remains flat or declines, trend-following models linked to the S&P 500 tend to switch to a selling mode.

“Over the past few weeks, we’ve seen extreme demand for hedging tools among clients,” Goldman traders wrote. “Because market narratives and price movements have been ‘out of sync,’ frustration among investors with long positions has been building.”

Gold has long been viewed as a hedge against macroeconomic uncertainty and stock market downturns, fitting into many tactical defensive strategies. The price of gold has surged past $5,000 per ounce, offsetting losses in many portfolios amid stock market turbulence, but volatility has also spread into this traditionally stable asset.

Jacie Rosner, Managing Director at PAAMCO Prisma, who oversees allocations in hedge fund strategies including systematic ones, said gold could reach $6,000 or higher this year.

Rosner stated, “Despite recent gains, institutional allocations to gold remain structurally low. The allocation ratio is still below levels from 15 years ago. If macro uncertainty persists, there is still significant room for rebalancing,” she added. “Speculative positions are not crowded, retail participation is relatively low, and systematic trend followers are aligned with this trend.”

For now, abandoning stocks and rushing into gold has generated strong returns. McElhenny Sheffield Capital Management’s returns this year have reached 4.35%.

“If the market re-establishes a broad upward trend, we will participate,” Morris said. “But until the data confirms that, we prefer to stay defensive.”