As market volatility increases, quant funds are withdrawing from US stocks and rushing into safe-haven assets.

It has been noted that the recent wave of volatility sweeping through the U.S. stocks has led some quantitative investment management institutions to completely liquidate their stock holdings and shift towards low-risk assets. This shift reflects a broader trend among systematic investors. These investors rely on quantitative signals rather than fundamental analysis, utilizing data and model-driven allocation schemes to mechanically increase exposure in a sustained upward trend, and reduce risk when volatility intensifies or trends weaken. Due to investors weighing the threats and opportunities brought about by AI, as well as considering the impact of geopolitical tensions and trade policy uncertainties, the S&P 500 Index has experienced turbulence in recent months. The average daily volatility of the index this month is 1.2%, the highest since November last year, and the actual volatility is currently at its highest level since December. This intense volatility has forced trend-following investment firm McElhenny Sheffield Capital Management to reduce its stock allocation to zero on February 6. The institution has instead shifted towards safer and stable assets such as gold and U.S. treasuries. Their model relies on price, market breadth data, and relative strength indicators, showing that the stock market will not exhibit any sustained upward trends, prompting them to abandon the pursuit of excess returns and adopt a capital preservation strategy. Grant Morris, the portfolio manager and Chief Operating Officer of the institution, said, "When the market touches our risk management levels, we go full defense, only allocating to stocks when evidence suggests a rising trend. If there is no evidence, we exit completely." The skewness of one-month standardized put options has reached its highest level in over a year. While the complete liquidation of stocks by McElhenny Sheffield Capital Management may be seen as extreme, it is consistent with the shift in allocations by Commodity Trading Advisor (CTA) funds. According to Barclays bank data, these funds that rely on mathematical models to make investment decisions have reduced their U.S. stock allocations to around the 50th percentile. Barclays derivative strategist Stefano Pascale wrote, "Given that U.S. tech stocks remain the most vulnerable sector, the allocation ratio may further decrease. Even if prices remain relatively stable in the coming days, CTAs may continue to sell off and potentially shift to short positions." Tech stocks led the latest volatility on Wall Street on Thursday. Nvidia fell by 5.8% at one point, dragging the Nasdaq 100 index down by over 2%. However, the index rebounded in the later part of the trading session, closing down by 1.2%. After months of steady gains, the stock market is showing signs of fatigue. The oscillating price movements, weakening market internals, and sharp intraday volatility have eroded many of the trend signals that models rely on. Market breadth indicators for U.S. stocks (such as comparing rising shrinking volumes to falling expanding volumes, highs versus lows) are now being considered along with momentum and trend signals. This setting of quantitative models may exacerbate market volatility, especially downward pressure. Gold has long been considered a hedge against macro uncertainty and stock market pullbacks, aligning with defensive deployments in many tactical strategies. The astronomical gain in gold prices above $5000 per ounce has made up for losses in many portfolios amidst the turmoil in U.S. stocks, but volatility has also spread to this traditionally stable asset. Jacqui Rossner, Managing Director at PAAMCO Prisma, responsible for allocating funds in hedge fund strategies including systematic strategies, said gold prices may reach $6000 or higher this year. Rossner said, "Although there has been some recent upside, institutional positioning in gold remains structurally low. The allocation ratio is still below levels from 15 years ago, leaving significant room for reallocation if macro uncertainty persists. Speculative positions are not crowded, retail participation is relatively low, and systematic trend followers are in line with this trend." So far, shifting out of stocks and into gold has yielded strong returns. McElhenny Sheffield Capital Management has a return of 4.35% this year. "If the market establishes a broad upward trend again, we will participate," Morris said. "But until data confirms that, we would prefer to play defense."