Why a volatility spike can force funds to sell after prices have already fallen

I’ve been learning about volatility-targeting strategies, and this part feels counterintuitive: a fund can cut exposure after a market fall even if its long-term view hasn’t changed.

A simplified rule is:

exposure ≈ target volatility ÷ estimated volatility

If a strategy targets 10% volatility:

\- 10% estimated volatility → about 100% exposure

\- 20% estimated volatility → about 50% exposure

\- 25% estimated volatility → about 40% exposure

So a sharp fall can create this sequence:

prices fall → measured volatility rises → allowed exposure falls → the strategy sells.

The selling is mechanical, not necessarily a bearish forecast. The timing depends on the measurement window, smoothing and rebalancing rules, so funds won’t all react at once.

I think investors focus on the target number but not enough on how volatility is measured. Which matters more in practice: the target itself, or how quickly the estimate reacts?