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 Bridgewater's "All Weather Fund" fell 4.2 percent in August and is
down 3.76 percent so far this year, according to three people
familiar with the fund's performance on Thursday.
Equity markets worldwide stumbled in recent weeks, driven lower by
concerns about China's growth and worries that the U.S. Federal
Reserve will soon raise rates. The moves, coupled with weakness in
commodities and bonds, wreaked havoc on hedge funds that use
risk-parity strategies, which are supposed to make money for
investors if bonds or stocks sell off, though not if both markets
fall at the same time.
Investors, including Leon Cooperman's and Steven Einhorn's Omega
Advisors plus some other hedge fund managers, are blaming
risk-parity strategies for the market's recent volatility and the
forced selling that drove stocks down 10 percent in five sessions
near the end of August. Omega's funds fell between 9 percent and 11
percent last month.
However, analysts note that so-called risk-parity funds such as
Bridgewater oversee about $500 billion, a small fraction of the $3
trillion managed by hedge funds. Bridgewater, the world's largest
hedge fund, manages $162 billion in assets and the All Weather Fund
is one of its two big portfolios.
Besides Bridgewater, the big players in the risk-parity space
include Cliff Asness' AQR Capital Management and Invesco.
Risk parity is a popular investment option for many pension funds
and has been marketed by Bridgewater and Wall Street banks as way to
hedge market turmoil.
Risk-parity strategies are designed for low volatility and generally
allocate more toward bonds than equities. Often, though, clients
want additional volatility, so a manager applies leverage through
borrowing.
Chintan Kotecha, an equity-linked analyst at Bank of America, said
that these types of portfolios have been known to add what is known
as a "volatility control" component, a mechanism that responds to
changes in market volatility by leveraging or deleveraging.
In the last several days, the equity market fell sharply and
investors did not rush to buy up safe-haven bonds, causing the bond
market to decline modestly as well.
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The lack of bond buying caused a big spike in volatility in these
funds – more than investors wanted – so they responded with a
dramatic level of selling, particularly in equities.
In a Sept. 1 letter to their investors, Cooperman and Einhorn of
Omega said the magnitude and velocity of the decline in the equity
markets in August "can be attributed to systemic/technical investors
that are price-insensitive and largely indifferent to fundamentals.
Such investors include risk-parity funds, derivative hedgers,
trend-following CTA's, and insurance variable-annuity programs."
Thursday, Bank of America discussed the topic with institutional
investors on a conference call to educate clients. Separately,
several risk-parity managers said that they were being made into
scapegoats for a sell-off they did not cause.
Their reasons? In total, they do not have enough money under
management to cause such ructions and they generally do not adjust
their positions so quickly.
"Risk-parity managers don't typically adjust their net exposure to
equities by a significant amount on an intramonth basis," said Lee
Partridge, chief investment officer at Salient Partners, which
offers a $500 million risk-parity fund.
Analysts at JPMorgan Chase & Co estimate that varying types of
funds, including these funds, have completed about half of their
selling as a result of the market's moves and are expected to sell
another $100 billion.
“We expect elevated volatility and downside price risk to persist.
In our view, the risk/reward for equity investors remains in favor
of waiting, rather than being fully invested until there is more
clarity from macro data and central banks,” JPMorgan wrote.
The Salient Risk Parity Index, which is being used by the market as
a benchmark, has fallen 5.78 percent this year but since the start
of 2014 it shows an annualized return of 2.56 percent.
(Reporting by Jennifer Ablan and David Gaffen; Svea Herbst-Bayliss
in Boston; Editing by Lisa Shumaker)
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