I recently told you that volatility is about to come back to life.

In fact, it’s already happening.

From the close last Thursday through the close yesterday, markets have fallen 2.48%. That’s the power of volatility.

Sometimes it’s a seasonal phenomenon. Traders return from the summer doldrums and markets resume normal business – and volatility gets up of the floor and starts scaring traders again.

This year, though, the timing could not have been worse.

Right now, there’s a massive $400 billion cross-market bomb sitting there, waiting for something to set it off – and market volatility could be just the thing to blow it up.

Today I’m going to tell you where this bomb is planted and how a spike in volatility could light the fuse.

Here’s what you need to know…

The Portfolio Model That’s Threatening Markets

The more than $400 billion powder keg’s actually a portfolio management trend that’s been growing for years.

It’s called “risk parity” and it makes perfect sense.

Bridgewater, the largest hedge fund in the world, runs its $70 billion All-Weather Fund using this strategy. In fact, according to Bank of America reports, there’s probably more than $400 billion being managed using this popular portfolio allocation strategy.

Risk parity, according to ZeroHedge is a, “cross-asset allocation portfolio model that assigns weight inversely proportional to volatility.”

In other words, multi-billion dollar funds and monster macro-global portfolio managers who diversify (because diversification is supposed to reduce portfolio risk) across an array of asset classes and need an allocation model that mathematically or otherwise tells them how to spread their capital across those different asset classes, are using volatility to weigh how much money goes into which asset classes.

Often criticized for placing performance ahead of concerns that the management technique exacerbates market turbulence, risk parity strategies produced dismal results last year thanks to excessive volatility in too many asset classes, including commodity prices, currencies,  and equity markets exhibiting crazy volatility by alternatively rising, falling and rising again into year-end 0f 2015.