Where to Find Alpha: Anti “Risk Parity” Strategies (2015-2017+)
September 22, 2015 Leave a comment
THESIS: Anti “Risk Parity” Strategies will be a major source of alpha generation from Q4 2015 – 2017 (if not beyond). I recommend that investors with allocation to Risk parity strategies pull out ASAP. I am not , and I have no interest in rigorously justifying my thesis. Rather, I will tease you with some hints/considerations/questions:
- Why is Ray Dalio making more media appearances than even Warren Buffett? Arguably, Cliff Asness too, though his/AQR’s appearances seem a bit more measured. Both seem highly defensive of risk parity. Why? If you’re in a position of strength, why be defensive? Does not pass the “sniff test”.
- Why does Bridgewater “backtest” returns without factoring in the impact that their and other RP funds’ presence would’ve had on markets in those past periods? http://www.bwater.com/Uploads/FileManager/research/Our%20Thoughts%20about%20Risk%20Parity%20and%20All%20Weather.pdf
- Why is it that some obscure outfit called Renaissance Technologies seems to obsess over modeling expected profit potential of a strategy as a function of its size?
- If Bridgewater and other RP funds’ AUM went to zero, would the world care? Would the world be any worse off?
- Assume I am wrong. Examine the claims of the RP proponents.
- Compare/verify/test the proponents’ claims with evidence.
- How much AUM is dedicated to RP strategies? How much EXPOSURE do these funds have (i.e., how much leverage)?
- The Leon Cooperman / Omega Advisor quotes regarding Risk Parity are a distraction…the reality and truth are perversely ironic. Time will reveal all.
- Why should the immediate and more distant future resemble the past, when the immediate past and present wildly differ from most of history?
- The best “risk-adjusted” way of implementing “Anti Risk Parity” will likely be quite…boring. Though immensely profitable.
- There at least several different ways of implementing Anti “Risky Parity” … they are not complicated. At all.
- For the large institutions with allocations to “risk parity hedge funds” (e.g. pensions, endowments, etc), implementation of anti risk parity will help you both (I) save a significant amount of money and (II) handily outperform risk parity. The benefit of anti risk parity and/or reducing risk parity exposure is not only experienced via alpha generation, but via reduced costs (i.e. you need not pay a 1-2% management fee, nor a 20% incentive fee).
- The crowded-ness of risk parity strategies AND unpredictable behavior of the “left hand side” of the balance sheets’ of risk parity operators opens up the path to non-linear outcomes, all detrimental to risk parity investors.. the prudent course of action would seem to reduce exposure to “risk parity” strategies by 50-100% before year’s end (2015). Those with bolder ambitions may not only seek to reduce risk parity exposure to zero, but substitute that exposure with anti risk parity.
- This AQR “research” piece regarding risk parity is of dubious quality: https://www.aqr.com/cliffs-perspective/risk-parity-the-dog-that-did-not-bite it cites verifiably poor sources of hedge fund information in order to justify/estimate industry/strategy net and gross exposures. Furthermore, single stock short sellers regularly release far more thorough research on simple stocks… one would expect that a company of AQR’s calibre (and resources) can do better than this.
- Anti risk parity is NOT a “bullish” or “bearish” stance… it’s more complicated than that (although its implementations can be elegantly simple). The only thing I’m “bearish” is the performance of “risk parity” strategies (at minimum, on a relative basis…you add in the fees, and it becomes a no-brainer to be “short” risk parity).
- Based on other market participants’ public commentary / positioning, there are clearly others who are de facto positioned and/or positioning themselves in an anti risk parity fashion… though they may not be seeing it that way (or maybe they do).
- I may agree with some of the Risk Parity proponents’ reasoning in disputing the Leon Cooperman assertions… yet I may disagree with their overall portrayal of risk parity (perhaps errors of omission).