The heaviest stock selling by volatility-linked funds appears to have largely run its course last month, potentially setting up U.S. indexes for gains should market swings subside in coming weeks.

The U.S.-Iran conflict and surging oil prices have given investors plenty of reasons to sell, with systematic strategies that automatically offload equities when volatility rises acting as a particularly potent source of selling pressure.

Volatility-linked strategies, which adjust equity exposure based on market risk, have grown in popularity in recent years.

Although the assets they manage are modest relative to the broader market, analysts say the funds bear watching: by buying as markets rise and selling when stocks tumble, they can amplify price swings in either direction.

The strategies that include volatility control funds and commodity trading advisers (CTAs) dumped $24 billion in stocks last week, bringing total net sales since the start of March to around $108 billion, according to Nomura.

Assets in these types of strategies, including risk-parity funds, are about $1 trillion or slightly higher, according to Nomura.

The selling has left the equity exposure of these strategies at some of the lowest levels in recent years, with only 20% of past observations showing lower levels, according to Nomura.

"The outlook is turning more neutral, but not yet a tailwind," Nomura cross-asset and equity derivatives strategist Joanna Wang said.

"If volatility picks up from here, there's still meaningful selling capacity in the system," she added.

These strategies key off realized volatility levels looking back a month or more — and despite the pullback in the Cboe Volatility Index (VIX), which measures traders' expectations for future market gyrations, these historical measures remain close to their highest levels since the immediate aftermath of the tariff-induced shock in April 2025.

For instance, the S&P 500's one-month historical volatility, at around 21%, is near its highest level since mid-May 2025, and more than 5 points above its 20-year median reading.

For bulls, the silver lining is clear: with equity exposure already pared back sharply, these funds have far less firepower for any selling.

"We're moving past the steepest selling," said Wang.

"Strategies like volatility control and CTAs have already taken a lot of risk off the table," she added.

Should volatility hold at current levels or continue to moderate by late April, Nomura's models estimate systematic strategies could turn net buyers of around $20 billion by early May.

However, if volatility picks up materially, these strategies could shed a further $48 billion in equities by end-April, Nomura estimates.

Although the dollar value of the selling is modest relative to the roughly $55 trillion value of the S&P 500 alone, such funds bear watching because of the timing and manner of their market activity, analysts said.