By Trevor Hunnicutt
NEW YORK (Reuters) - Investors searching for perpetrators and victims in this week's U.S. stock market selloff pointed to a familiar source: number-crunching fund managers and machines.
The benchmark U.S. S&P 500 stock index <.SPX> marked its biggest one-day fall since February and added to those losses on Thursday.
The carnage followed a debt market selloff this month driven by expectations that U.S. inflation will be strong enough to warrant further rises in interest rates the Federal Reserve, but not all investors think the selling made sense.
"Warren Buffett made his fortune by buying low and selling high," said the billionaire hedge fund manager Leon Cooperman, founder of Omega Advisors Inc. "Machines buy strength and sell weakness and aggravate the moves. There was no reason for that kind of a move yesterday."
The order of events, rising bond yields followed by a stock market selloff, recalled a similar event in February and also put focus on a host of mechanical investment strategies from risk-parity funds to commodity trading advisers (CTAs) and trend followers.
A 2017 paper by LongTail Alpha LLC chief investment officer Vineer Bhansali and USC Marshall School of Business professor Lawrence Harris estimated that total assets under management in a set of strategies that respond to risk is about $1.5 trillion, including risk-parity funds, volatility targeting funds, and trend followers.
"When there's $1 trillion in mitigating the downside, there's a good argument to be made that it actually creates more downside because now they're all selling at the same time," said David Lafferty, chief market strategist at Natixis Investment Managers.
"When everyone does it, they create the problem they're trying to avoid."
Michael Purves, chief global strategist at Weeden & Co, said the market action suggests rules-based, volatility-contingent investment strategies adjusted to the sharp selloff in long-term Treasuries.
"When massive elephants move stuff around it can drive a lot of violence," he said. "It doesn't mean equities are broken but it means in the medium term they get spicy."
A strategy popularized after the wreckage of the 2008 financial crisis, "risk parity" often sees itself blamed when stocks see steep selloffs. Risk parity funds themselves, however, said they were not to blame.
Bob Prince, the co-chief investment officer at Bridgewater, said the world's largest hedge fund's All Weather strategy, which launched the risk-parity movement in 1996, does not actively trade and, while it does periodically adjust, has not done so since the market selloff began.