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Risk Parity Is Supposed to Be All Weather. That’s Not Happening.
Risk-parity strategies do better than expected, but are all over the map, according to MPI.
Some risk-parity funds have held up better than expected, amid criticism that they’ve added to market volatility and may be outdated.
These conservative multi-asset strategies — designed to do relatively well in all types of markets — have performed very differently from each other, according to a new returns-based analysis from Markov Processes International.
MPI analyzed 10 risk-parity mutual funds, whose daily net asset values are public, unlike category leader Bridgewater Associate’s $60 billion All-Weather funds. This way, MPI could use dynamic style analysis to determine recent allocation changes and get an early indication of how opaque risk parity hedge funds might have fared before their March performance numbers are available.
Among the least-bad performers were Columbia Threadneedle’s Adaptive Risk vehicle and Putnam PanAgora Risk Parity, which lost 5.7 percent and 4.8 percent year-to-date in 2020, respectively. The RPAR Risk Parity ETF — launched in December by a Bridgewater vet’s firm – returned negative 0.1 percent. That ETF charges 50 basis points.
AQR Capital Management’s risk parity and multi-assets funds were in the middle of the pack, losing 8.8 percent and 10.4 percent for the period, respectively.
Among the worst performers were the AllianceBernstein Global Risk Allocation fund, which sunk 18.2 percent year-to-date as of April 9. The risk parity fund from robo advisor Wealthfront lost 18.8 percent. For comparison, a domestic portfolio with 60 percent stocks and 40 percent bonds generated a return of negative 5.9 percent.
[II Deep Dive: Risk Parity Beats the Endowment Model]
The deepest fund losses occurred during the week of March 16. According to MPI, maximum drawdowns ranged from 13.4 percent (Columbia Adaptive Risk CRAAX) to 42.8 percent for the Wealthfront Risk Parity fund. On average, the mutual funds’ losses hit 22.2 percent — similar to domestic and global 60/40 benchmarks and better than risk parity indices. AQR’s risk parity and multi-asset and Putnam PanAgora lost less than the benchmarks, as well.
Risk-parity funds generally target volatility of 10 percent to 15 percent, lever up fixed income allocations, and gradually shift among asset classes. Even with this narrow definition, MPI found that managers vary widely in implementation.
MPI also analyzed leverage to address accusations that risk-parity funds have made volatility worse and fueled market selloffs. On average, implied leverage dropped from 80 percent to less than 30 percent between January and April 9, MPI found.
“If the upper end of the estimated asset base [$400 billion] was similarly levered,” the analysts wrote, “and if hedge funds and other risk allocation strategies behaved like the mutual funds, this does represent a significant deleveraging during a period of intense market stress that extended to the most liquid and traditionally safe assets. It’s certainly possible that risk parity funds were a contributing factor, and possibly a significant one, to the drawdowns, correlation breakdowns and volatility witnessed in March.”