In “Waiting For Inflation,” I noted that potential vol control de-leveraging is still a subplot worth watching in the equities space.

That probably understates the case. The exposure add in 2023 has vol control cohorts sitting with a very high equity allocation, and with base vol as low as it is, it wouldn’t take much in the way of movement to destabilize that exposure.

Notwithstanding a few interesting days courtesy of a lively long-end in the US Treasury curve, there’s been no real range expansion in stocks, and realized vol has barely perked up.

Without a wider distribution of spot outcomes, the situation can remain “stable,” where the scare quotes are there to denote that “stable” is a bit of misnomer in this context.

As regular readers will attest, this is a perpetual topic du jour in these pages. As noted above, I mentioned it again on Wednesday afternoon, and wouldn’t you know it, Bloomberg ran a piece a few hours later based on precisely the same premise and indeed on precisely the same passage from an August 8 note by Nomura’s Charlie McElligott. It was called “A Week of 1% Moves on the S&P 500 Could Trigger Forced Selling.”

The relevant note is actually from Tuesday, and the numbers in question obviously aren’t static, but the actual, unedited, quote from Charlie read as follows:

In the meantime, Vol Control flows remain front-and-center for all the reasons recently discussed: so full on their Equities exposure (95%ile on 3Y lookback) that the asymmetry of “potential sell flow vs potential for additional buy flow” is enormous—where no change in SPX daily projected for 1w would be +$2.3B of additional BUYING…but a daily + / – 1% move projected out for 1w would mean ~ -$32.6B of SELLING

Again, these figures change every day, so the point isn’t so much the actual numbers. Rather, the main takeaway, as I put it Wednesday, is that “spot effectively needs to trade unchanged to avoid vol control de-leveraging.” It’s nice that Bloomberg noticed.

For those of you who enjoy the pictures, the figure below shows the estimates that Bloomberg referenced on Thursday. To reiterate (and as noted in the annotation): The figures were as of Tuesday.

It’s extraordinarily unlikely that US equities would average a 3% move for a month straight, but if they did, the implied de-allocation flow from vol control would approach $180 billion.

It’s also worth noting that Bloomberg’s piece suggested this is all risk parity. That’s not true. Vol control covers all manner of strats, and typically, risk parity gets separated and analyzed on its own.

In any event, it was virtually guaranteed that a few readers would inquire as to the Bloomberg piece given how often I discuss this dynamic in these pages, so I figured I’d go ahead and cover it.

The bottom line: You need some event — specifically, an event that pushes up correlations such that factor and style rotations under the surface don’t “offset” — to get stocks moving again at the index level for a sustained period. If the distribution of daily returns widens out, that’s when the accumulated vol control exposure is at risk of being unwound.