Risk Parity Trade Made Famous by Ray Dalio Is Now Ringing Alarms
Comment of the Day

March 12 2020

Commentary by Eoin Treacy

Risk Parity Trade Made Famous by Ray Dalio Is Now Ringing Alarms

This article by Justina Lee for Bloomberg may be of interest to subscribers. Here is a section:

Vontobel Asset Management’s risk-parity product has cut its stock position from 140% about a month ago to around 28%, while its bond exposure remains around 260%, says head of multi-asset Daniel Seiler.

“You reduce your volatility with a negative correlation and if that is not the case anymore, you will obviously need to reduce the volatility with a different measure and this could deleverage your whole portfolio,” he said from Zurich, referring to the link between bonds and shares.

On a positive note, for both asset classes to fall in tandem for an extended period, “what you would need is an inflationary shock and at the moment I don’t see that at all,” Seiler added.

With bond yields now so low, there are others on Wall Street who may disagree.

Eoin Treacy's view

An inflation scare is one possible scenario where both bonds and equities fall at the same time. It is not the only one. Against a background where the pace of economic activity is taking a war-like dislocation the bigger risk is a solvency crisis or a liquidity crisis.

The Advanced Research Risk Parity Index has had its largest retracement since 2008 which is a clear signal investors are now hoarding cash.

The Dollar sold off over the last month as carry trades were unwound but the recent rebound is probably more about repatriation of cash than any other single factor.

The weakness in gold and bitcoin is also a reflection of the desire to raise cash even from assets that are traditional safe havens and which are likely to perform well once the panic selling abates.

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