Market News

(Bloomberg) -- The latest bout of volatility lashing US stocks has driven some quantitative investment managers completely out of equities and into less risky assets.

The shift reflects a broader repositioning among systematic investors who rely on quantitative signals rather than fundamental analysis. These funds use data and model-driven allocation to mechanically increase exposure during sustained uptrends and cutting risk when volatility rises or trends weaken.

The S&P 500 Index has turned turbulent in recent months as investors weigh the threat and promise of artificial intelligence and consider the implications of geopolitical tensions and uncertain trade policies. The index has moved 1.2% on average intraday this month, the most since November. And realized volatility is now at the highest since December.

The swings pushed McElhenny Sheffield Capital Management, a Dallas-based trend-following money manager, to move its equity allocation to zero on Feb. 6. The firm rotated into the relatively safety and calm of gold and US Treasuries. Its models, which rely on a indicators such as price, market breadth data and relative strength measures, suggested there wouldn’t be any sustained uptrend in equities, forcing a move into capital preservation over hunting alpha.

“We go fully defensive when the market moves through our risk management layers,” Grant Morris, portfolio manager and director of operations at the firm said at the iConnections Global Alts conference in Miami Beach, Florida. “We only allocate to US equities when there’s evidence of an uptrend. When that evidence isn’t there, we’re completely out.”

McElhenny Sheffield Capital Management’s move out of equities entirely may be extreme, but it is of a piece with a shift in allocations at commodity trading advisors, or CTAs. The funds who rely on mathematical models to make investment decisions have cut allocation to US equities to around the 50th percentile, according to data from Barclays Plc.

“It is likely to decline further as US tech remains the most vulnerable with CTAs likely to keep selling and potentially turning short even if price action stays broadly flat in the coming days,” the firm’s derivatives strategists led by Stefano Pascale wrote.