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Bridgewater's 'All-Weather' Fund Goes Negative For 2015 After Risk-Parity's Worst Quarter Since Lehman

Tyler Durden's picture




 

The $80 billion Bridgewater All Weather Fund, a risk-parity model managed by hedge fund titan Ray Dalio, was down 4.2% in August, according to Reuters citing two people familiar with the fund's performance. This leaves the fund down 3.76% for 2015 as the frameworks for these funds are forced mechanically to reposition as correlations and volatilities across asset classes break down. Just as we saw in the summer of 2013's Taper Tantrum, the last 2 weeks have seen 4 to 5 sigma swings in daily returns and 'generic' risk-parity funds have suffered the biggest 3-month losses since the financial crisis.

 

And here is the simple reason why these funds 'broke'... China selling Treasuries to meet liquidity needs as global carry trades were unwound and smashed stocks lower 'broke' the historical relationship between stocks and bonds. Since the so-called "risk parity" strategy is supposed to make money for investors if bonds or stocks sell off, though not simultaneously.

 

And this did not help the multi-asset funds - the USD-Commodity correlation regime flipflopped...

 

Simply put, the historical relationships between asset classes (volatilities and correlations) that are used to construct optimal "risk-parity" funds in order that 'risk' is balanced and hedged across bonds and stocks (for example) broke down dramatically:

First, realized volatilities exploded relative to historical (or even forecast volatilities) that are used to weight exposures; and

 

Second, the correlation regime entirely flipped for multiple asset classes - entirely breaking any 'expected' diversification or hedges.

And the result...based on Salient Risk's Risk Parity fund index, the last 3 months have seen a 10.7% drop - the most since the financial crisis (and worse than the mid 2013 plunge). Some context for the recent moves may help:

  • Friday August 21st - 4 Sigma plunge
  • Monday August 24th - 5 Sigma crash
  • Thursday August 27th - 5 Sigma Spike
  • Tuesday September 1st - 4 Sigma collapse

Risk manage that!

 

Which explains why we also saw the big drop in mid 2013 (Taper Tantrum) when - just as this past 2 weeks - bonds sold off and stocks sold off...before a complete flip-flop right aftre the June FOMC meeting.

 

We asked in August 2013 - When Will Risk Parity Funds Blow Up Again? - it appears we have our answer.

As UBS' Stephane Deo noted then (and JPMorgan has confirmed now), that in a rising rate environment, so-called risk-parity portfolios were susceptible to draw-down as yields 'gap' higher.

As UBS noted at the time, which seems just as crucial now, it is not the actual rate increases (or decoupling) but the "speed limit" or velocity of the moves and with liquidity either 'on' of 'off' now, the gappiness of moves increased the potential threat from risk-parity funds.

And as JPMorgan's head quant noted today, the management of this exposure (i.e. the selling) is only half-way through.

Risk Parity strategies de-lever when asset volatility and correlation increase. In our report last week, we estimated that risk parity outflows from equities may total $50-100bn on account of the increase in market volatility and risky asset correlations. These rebalances have started, but, given their typically slower rebalance frequency (e.g. monthly), are largely incomplete. We believe the bulk of the risk parity flows are yet to come, and this may add selling pressure to equities over the next 1-3 weeks. To illustrate this point, one can look at a sample multi-asset Risk Parity strategy such as the Salient Risk Parity index. The beta of this index to the S&P 500 (shown in the figure above) reached highs of 60% in early August, and has dropped to about 45% currently (compared to a beta of 0% during some of the previous episodes of market volatility).

Charts: Bloomberg

 

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Thu, 09/03/2015 - 17:30 | 6506384 CunnyFunt
CunnyFunt's picture

All the fund needs is a re-brand to "All-Pleather."

Thu, 09/03/2015 - 18:31 | 6506666 Grinder74
Grinder74's picture

Gosh darn, now they'll only earn $1,539,840,000.00 in management fees. Down twinkles. :( :( :(

Thu, 09/03/2015 - 19:17 | 6506850 Ban KKiller
Ban KKiller's picture

The smell of withdrawal is in the air! See FIG as well. 

Thu, 09/03/2015 - 20:17 | 6507021 El Oregonian
El Oregonian's picture

Bug out Bags at the ready...

Fri, 09/04/2015 - 02:23 | 6507926 flyingpigg
flyingpigg's picture

Our fund was designed to protect your wealth in all weather conditions. 

disclaimer: we don't offer protection in a hurricane combined with rain.

Thu, 09/03/2015 - 17:31 | 6506388 Ham-bone
Ham-bone's picture

Japanese and German population declines are not aberrations...they are the trend setters in a secular declining growth rate globally and likely move toward outright global population declines.

 

http://econimica.blogspot.com/2015/09/secular-sea-change-depopulation-viewed.html

read this...tell me why I'm right, wrong, full of shit...whatever, but this is by far the most important thing I've written.

Thu, 09/03/2015 - 17:59 | 6506513 Cosmicserpent
Cosmicserpent's picture

You and Harry Dent.

 

Thu, 09/03/2015 - 17:32 | 6506393 Glass Seagull
Glass Seagull's picture

 

 

Well, when you're running a risk parity fund that's basically long USD, US long bonds, and long US stock indices, and then SAMA and Bank of Israel begin selling US assets in response to the Iran deal...this is what happens.

 

 

Thu, 09/03/2015 - 17:35 | 6506402 buzzsaw99
buzzsaw99's picture

...this may add selling pressure to equities over the next 1-3 weeks.

1-3 weeks, yeah, right. i expect selling pressure for the next 1-3 decades.

Thu, 09/03/2015 - 17:47 | 6506455 QE crack addict
QE crack addict's picture

Wa wa wa wa wa wa wa waaaaaaaaaaaa

Thu, 09/03/2015 - 18:11 | 6506577 Soul Glow
Soul Glow's picture

Give stock pros your money because they know moar than the market does.

Thu, 09/03/2015 - 18:22 | 6506626 Seal
Seal's picture

maybe the Fed can give Bridgewater a special exclusive QE of their own

Thu, 09/03/2015 - 18:57 | 6506788 khakuda
khakuda's picture

Exactly.  Laughable to see him calling for QE last week.  "Help!  I'm a billionaire and the richest man in Connecticut and my fund is down a couple %.  I NEED MOAR QE!!!!"

Thu, 09/03/2015 - 18:30 | 6506659 stant
stant's picture

After the next crash it will be " since Obama"

Thu, 09/03/2015 - 18:34 | 6506683 kaa1016
kaa1016's picture

This is what happens when these guys are too smart for their own good. These types of strategies always works great until they don't. LTCM, the financial crisis 08 - 09, and now the beginning of the great unwind. This is going to play out over years because the central banks will do what ever they need to do due to pain avoidance.

Thu, 09/03/2015 - 19:15 | 6506845 Ban KKiller
Ban KKiller's picture

That is what I was thinking. Except I was saying we thought these fucks knew it all...

Thu, 09/03/2015 - 19:25 | 6506867 Hongcha
Hongcha's picture

Gold and oil are putting in bottoms here.

Thu, 09/03/2015 - 19:26 | 6506870 Keltner Channel Surf
Keltner Channel Surf's picture

Just rename 'em "Risk Parody" funds, market them for 'sophisticated clients with special situations' and double the fees

Thu, 09/03/2015 - 20:33 | 6507057 chinaboy
chinaboy's picture

Makes you wonder what is the mathematical basis of the portfolio.

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