(Editor's note: Hedgeye Jedi Christian Drake from our Macro Team offers some thought-provoking observations regarding Bridgewater's issues with its All Weather fund (see Bloomberg story "Dalio Patched All Weather’s Rate Risk as U.S. Bonds Fell" for additional background)).
When good ideas go bad……
If you hold a canonical 60/40 portfolio of stock/bonds, the risk adjusted exposure to bonds is not 40% - it's something less than that given that bond volatility/risk is lower than that of equities. If however, you lever up the bond portfolio you can magnify fixed income returns, equalize equity & fixed income risk, and increase risk adjusted portfolio returns. This is the basic idea of Risk Parity (ie. Bridgewater) and risk parity style funds
Risk Parity is a cool idea – it is an especially cool idea when you are levering up exposure to an asset class in the midst of a 35-year bull run.
“All Weather” strategies, however, suddenly see only rain when fixed income goes convex and cross-asset class correlations tighten (ie. you are levered long falling bond prices and stocks & commodities are declining as well) such as what happened in June post the Taper announcement. Risk-parity strategies got smoked on both an absolute & relative basis.
Decades long Queen Mary based correlation strategies need to be re-thunk &/or remixed when queen mary starts her secular journey the other way.
AQRIX/ABRYX are the lead risk parity mutual funds and a Risk Parity ETF is waiting in queue for SEC approval – keep an eye out for that as a short candidate if we move towards getting a repeat of June.
…Just some thoughts as them there #Rates keep arisin’