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Hedge funds  Following
Risk parity funds enjoy welcome respite
Investment strategy has endured tough ride in recent years and blamed for extending market swoons

AN HOUR AGO

by: Robin Wigglesworth in New York
Risk parity funds, blamed by some analysts for exacerbating market turbulence in recent years, have enjoyed a welcome bounce thanks to a bond market rally and recovering commodity prices, restoring some of the sheen to the popular investment strategy.


The funds invest in a variety of asset classes and markets depending on their mathematical volatility rather than traditional balanced funds that might simply put 60 per cent of their money in bonds and 40 per cent in equities. Many use leverage to ensure that all asset classes contribute equally and to enhance returns.


The superlative long-term performance of the diversified strategy has caused an explosion of institutional investor interest, but many risk parity funds have done poorly since 2014. The performance of the strategy was particularly dismal last year, when commodity prices slumped, equity markets were volatile and bonds were generally rangebound.


After further pressure at the start of 2016, risk parity has recovered as market volatility has eased, bolstering asset prices. The Salient Risk Parity Index, which mimics a typical portfolio, is up 12.3 per cent from its January low. Its overall first-quarter gain of 7.1 per cent is the best in two years, and beat the performance of the FTSE World Index, the Barclays Global Aggregate bond gauge and the Bloomberg commodities index.


Lee Partridge, chief investment officer at Salient, said that February 11 was the point where “investors moved from a position of fear back to a position of greed”, helping boost risk parity funds.


The improving environment has been positive to several but not all risk parity funds. AQR’s $515m vehicle gained 5.1 per cent in the first three months of the year, and Salient’s smaller $57m fund rose 8.1 per cent. Yet it has not buoyed all funds equally. Putnam’s $178m risk parity fund gained only 1.8 per cent in the first quarter, and Columbia Threadneedle’s $508m fund rose 3.7 per cent.


Bridgewater’s giant $70bn All-Weather risk parity fund — the progenitor and populariser of the strategy — returned 2.35 per cent net of fees in the first three months of the year, said a person familiar with the matter.



Risk parity funds periodically rebalance their holdings in response to volatility, to ensure that the contributions of all the asset classes contained in its portfolio are roughly equal, and some analysts and fund managers have argued that by selling equities in response to turbulence can in fact fan market turmoil.


Nikolaos Panigirtzoglou, a JPMorgan analyst, argued in a note last week that risk parity funds and “commodity-trading advisers” — trend-following hedge funds that also ratchet up and down exposure in response to volatility — appear to have driven last month’s stock market rebound, as they ended their negative bets.