This is an irresistible temptation.
Dario of Bridgewater and other hedge funds saidJackpotnumbersLeave your money to us to take care of, and we will put it into a strategic product that will make a steady profit in the long run. Now, with dismal five-year returns, many investors who put money into risk parity funds are demanding divestment.
The size of risk parity funds has fallen by about $70 billion from its peak three years ago as investors such as New Mexico, Oregon and Ohio public pension funds are redeemed. To many of them, the so-called "more time" request sounds feeble
Verus Investments, a consultant on about $17 billion in public employee pensions in New Mexico, cut its investment in risk parity funds in December. "long-term returns have been disappointing," said Eileen Neill, managing director of Verus Investments. "the only time risk parity funds have been successful was in the heyday of the global financial crisis."
After the COVID-19 epidemic, the rate of return of such funds has always been lacklustre, shaking confidence in this way of asset allocation advocated by Dalio. The strategy focuses on diversifying asset allocation based on volatility and often uses leverage to optimize returns relative to venture funds.
Risk parity funds ushered in the spring after the 2008 financial crisis, as investors struggled to find a way to protect themselves in the next market crash. But as money returned to the stock market, risk parity funds began to lag behind, especially when safe-haven assets such as US Treasuries were hit hard in 2022.
Every year since 2019, risk parity funds have lagged behind global 60 Universe 40 funds, according to industry indices.
Investors have redeemed from risk parity funds because of poor returns, and Verus calculates that the size of such funds was about $90 billion at the end of 2023, well below the peak of about 160 billion in 2021, based on eVestment data.
The risk parity strategy was first established in 1996 to manage Dalio's trust assets, using in-depth economic research to develop the best possible portfolio, rather than trying to predict the next big event.
The core of the strategy is not to build risk positions for high returns, but to diversify a variety of assets, including commodities and bonds, so that each asset has an equal impact on portfolio volatility. In order to balance the risk, the allocation of assets in the strategy will rise or fall as the price fluctuates.
A difficult environment
For those bullish on risk parity, redemption funds at a time when share prices hit record highs reflect a typical investment mistake.
In a period of low interest rates, the stock and bond market remains high most of the time. Although the return of risk parity fund is positive, it is not as good as those that invest in a single asset. When the Fed began to raise interest rates in 2022, Treasury prices fell sharply before models could react, according to Markov Processes International. The volatility of many funds has exceeded targets, reaching even the highest level since the last financial crisis.
In an introduction to Indiana's public pension fund in September, Qiaosi acknowledged that its All Weather fund had lower-than-expected returns, but the company said spreading the money over a decade was a good advanced allocation, especially if the stock market rally was likely to stall.
All Weather's most popular product fell 22% in 2022, lagging behind most of its peers. According to Markov Processes's Michael Markov, this seems to be because funds are less responsive to short-term market volatility and changes in correlation coefficients.
Qiaoshui declined to comment.
