A closer look at volatility control funds and their place in the financial market ecosystem

Market observers have posited in recent years that Volatility Control (VC) funds represent a focal point of instability for financial markets. Their contention is that VC funds create a market feedback loop by selling equities when volatility is high, which in turn pushes volatility higher, triggering more selling. The implication is that VC funds will eventually be the source of the next 1987-style selloff. At first glance, the idea seems feasible; in practice, however, it fails to consider a number of important factors.