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Risk Parity’s Pioneer Faces Stiff Competition
With questions looming over risk parity, lower-cost retail vehicles are giving Bridgewater’s All Weather funds a run for their money.
Bridgewater Associates may have pioneered the so-called risk parity strategy, a conservative, multi-asset approach that is designed to do relatively well in all types of markets. But in March — one of the worst months for global markets in more than a decade — the mutual fund imitators that popped up to offer a cheaper version of the strategy have performed a lot better.
Lower cost retail funds, many of which also beat bellwether Bridgewater in the first quarter, aim to offer a transparent and liquid alternative to Bridgewater’s $60 billion All Weather funds, which represent the overwhelming majority of assets in risk parity. Bridgewater’s All Weather 10% Target Volatility fund lost almost 10 percent last month, while its All Weather 12% Target Volatility fund lost nearly 12 percent.
Bridgewater did not respond to a request for comment.
Fees and liquidity have become more important to investors as questions have loomed over the strategy’s efficacy. Risk-parity funds generally target volatility of 10 percent to 15 percent; lever up lower risk, fixed income allocations; and gradually shift among asset classes.
The democratization of the investments comes as critics argue that risk parity’s best days are behind it. Morgan Stanley, for one, has argued that given the long decline in interest rates, risk parity will underperform over the next ten years.
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Risk parity has also been blamed for exacerbating volatility and selling during market drawdowns in the past decade, including during the market rout in March. Nonetheless, asset managers of mutual funds and other lower-cost strategies have been able to spot the big shifts in risky assets that generally lead to good performance in risk parity.
Among the best performers in March — relatively speaking — were Columbia Threadneedle, with its Adaptive Risk fund ( which lost 2.84 percent) and Putnam PanAgora Risk Parity (down 6.13 percent). Notably, an exchange-traded fund from Advanced Research Investment Solutions, which was co-founded by a Bridgewater veteran, lost 7.01 percent. AQR’s two risk parity funds also bested Bridgewater’s offerings in March. A simple domestic portfolio of 60 percent stocks and 40 percent bonds lost -7.29 percent in March.
Bridgewater is also increasingly competing with newer and simpler risk parity funds. The Milliman Managed Risk Parity Moderate and Milliman Managed Risk Parity Growth Strategies lost 2.5 percent and 2.3 percent, respectively, in March.
Those results beat ten of the largest risk parity mutual funds, as well as the Bridgewater funds. The portfolio, which doesn’t use derivatives or leverage, is invested solely in ETFs.
According to a Milliman spokesman, March was the first time that Milliman's risk parity indices and strategies allocated to cash due to volatility.
“The current rate climate is much different than the one that risk parity was started in during the mid to late 1990s. Just last week, [Bridgewater founder] Ray Dalio, the pioneer of risk parity, said investors would be 'crazy' to hold government bonds,” said Joe Becker, portfolio strategist at Milliman. “The way the strategy has been implemented typically relies on levering up the bond allocations, because of the much lower historical volatility in bonds and the negative correlation to stocks that has presided over recent decades.”
But, as March demonstrated, when correlations switched and investors sold even Treasuries to raise cash — forcing yields up — “many conventional risk parity strategies were extremely volatile and struggled to deliver performance that was meaningfully different than a traditional, very inexpensive 60/40 balanced portfolio, which was also dented by the dash for cash,” Becker said. “Leverage can enhance returns in certain climates, but it can also lead to higher volatility.”