Recent waves of volatility sweeping through U.S. stock markets have prompted some quantitative investment managers to fully exit equity positions and shift into lower-risk assets. This shift reflects a broader reallocation trend among systematic investors, who rely on quantitative signals rather than fundamental analysis. These investors use data and model-driven allocation strategies to mechanically increase exposure during sustained uptrends and reduce risk when volatility intensifies or trends weaken.
As investors weigh the threats and opportunities presented by AI, alongside geopolitical tensions and trade policy uncertainties, the S&P 500 has experienced turbulence in recent months. The index’s average intraday swing this month reached 1.2%, the highest since last November, while realized volatility is also at its highest level since December.
This heightened volatility forced trend-following investment firm McElhenny Sheffield Capital Management to reduce its equity allocation to zero on February 6. The firm shifted into relatively safe and stable haven assets such as gold and U.S. Treasuries. Its models, which rely on price, market breadth data, and relative strength indicators, showed no signs of a sustained upward trend in equities, prompting a move away from chasing excess returns toward capital preservation.
"When the market triggers our risk management thresholds, we go fully defensive," said Grant Morris, Portfolio Manager and Chief Operating Officer at the firm. "We only allocate to U.S. stocks when there is evidence of an uptrend. Without such evidence, we exit completely."
While McElhenny Sheffield’s full equity exit may be an extreme case, it aligns with a broader shift in positioning among commodity trading advisor (CTA) funds. According to Barclays, these funds, which rely on mathematical models for investment decisions, have reduced their U.S. equity exposure to around the 50th percentile.
"With U.S. tech stocks remaining the most vulnerable sector, positioning could decline further," wrote Barclays derivatives strategist Stefano Pascale. "Even if prices remain largely flat in the coming days, CTAs may continue selling and potentially shift to net short positions."
Technology stocks led the latest bout of volatility on Wall Street on Thursday. Nvidia fell as much as 5.8%, dragging the Nasdaq 100 down more than 2%, though the index later pared losses to close 1.2% lower.
After months of steady gains, equity markets are showing signs of fatigue. Choppy price action, weakening market internals, and sharp intraday swings have eroded the trend signals many models depend on. U.S. stock breadth measures—such as advancing versus declining volume and new highs versus new lows—are now being considered alongside momentum and trend signals.
This quantitative setup may exacerbate market volatility, particularly on the downside. Data from Goldman Sachs Group show that systematic strategies' exposure to U.S. equities has turned negative so far this month. Goldman traders noted in a Wednesday report that demand for downside protection has surged in recent weeks. According to trading desk estimates, trend-following models linked to the S&P 500 tend to switch to selling mode if markets are flat or decline.
"In recent weeks, we have seen extreme demand for hedges across the client base," Goldman traders wrote. "Frustration appears to be building among investors who were overly concentrated in long positions, as market narratives and price action have become 'inconsistent.'"
Gold, long viewed as a hedge against macroeconomic uncertainty and equity downturns, fits well with defensive positioning in many tactical strategies. Its surge above $5,000 per ounce has helped offset losses in many portfolios during U.S. stock turbulence, though volatility has also spread to this traditionally stable asset.
Jackie Rosner, Managing Director at PAAMCO Prisma, who allocates capital across hedge fund strategies including systematic approaches, suggested gold could reach $6,000 or higher this year. "Despite recent gains, institutional allocations to gold remain structurally low," Rosner said. "Positioning is still below levels seen 15 years ago, leaving significant room for adjustment if macro uncertainties persist. Speculative positioning is not crowded, retail participation is relatively low, and systematic trend-followers are aligning with this move."
For now, abandoning stocks and moving into gold has delivered strong returns. McElhenny Sheffield Capital Management has achieved a 4.35% return this year. "If the market re-establishes a broad uptrend, we will participate," Morris said. "But until the data confirms it, we prefer to stay defensive."
