The recent stock market correction has been unremarkable in scale by past standards, writes Barry Riley

There was a similar, but smaller, shake-out last October when the FTSE All-World Index suffered a fall of 5 per cent. But the correction is unusual for having come out of the clear blue sky.

In fact, equity market volatility has been unusually low over the past few months. Recent pre-May market rises have varied in size, however, and the subsequent declines have been very clearly linked to underlying risk perceptions. What went up the most has come down the most.

The multi-asset class reversal can be viewed as a global risk reduction exercise. Investors and traders have been piling into successively more risky assets, commodities being at the end of the line. For some reason a breaking point was reached on Tuesday May 9th.

Volatility represents both a threat and an opportunity for asset managers. The question worth asking, though, is whether it is an independently-generated phenomenon or if it is fuelled by the managers themselves. Maybe the growth of alternative strategies has produced an exaggerated downside risk.

Over $1,000 billion (€792 million) has gone into hedge funds, a total capital base that is normally multiplied several times over through long/short positioning and leverage.

Emerging market equities and bonds have been successfully promoted as alternative asset classes, with the characteristics of increasing maturity, including stability. Clearly, though, the downside risks remain substantial.

Meanwhile, large sums have gone into commodities, even though many metals have recently looked very expensive by historical standards. Separately from hedge funds there has been growth in partially short equity strategies, and in high alpha bond funds - which trade in much more varied assets than the bonds against which they are usually benchmarked.

Outside the asset management sector itself, the big investment banks have been stepping up their proprietary trading, on which they have been making very big profits recently. It is becoming quite hard to separate hedge funds and investment banks, with individual traders readily moving from one sector to the other. Many of these operators require downside risk protection. Therefore market setbacks may trigger further waves of stop-loss selling.

Leverage may have to be unwound. All this is as old as the derivatives markets, but the scale appears to have multiplied and the effect in aggregate may be to exaggerate boom-and-bust tendencies in equities and other asset classes such as commodities.

Has the fringe taken over from the core? The "barbell" effect on the asset management industry has created marked polarisation between passive trackers and other beta-targeters on the one hand and highly active alpha-chasers on the other.

The question is whether there are enough traditional value-based practitioners, in the middle, selling high and buying low in a way which stabilises the system through persistent reversion to the mean.

For retail institutions high levels of volatility in the markets is a curse, because they hope to deliver consistency and smoothness to their generally risk-averse clients.

Paradoxically, in the short term, the clients tend to become sucked into the latest fashionable sectors, being encouraged in this by intermediaries seeking to churn client portfolios.

In the UK open-ended funds industry, for instance, the April statistics showed that the normally obscure "specialist" sector was raking in the most new money. The specialist sector only accounts for 5 per cent of the total assets in equity funds but in April funds in this classification pulled in 28 per cent of net retail sales.

This ragbag of a sector includes energy, gold, other natural resources, property, Latin American funds and many of the higher risk specialisations that have recently been hot - in fact so hot, indeed, that most of the recent buyers will have burnt their fingers. History repeats itself, but with variations. The technology sector funds, notorious stars of the previous bubble back in 1999 and 2000, remain in net redemption.

Meanwhile, the MSCI Emerging Markets index, which tracks the over-hyped BRIC markets - Brazil, Russia, India and China - crashed by 19 per cent in the middle of last month.

It is still ahead for the year so far. But we always knew that BRICs do drop.