Investment Strategy: Reducing risk

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Investment Strategy: Reducing risk

A fund trading strategy is facing a challenge from the policy response to the pandemic...

13th October 2020

A fund trading strategy that tracks hundreds of billions of dollars in assets and often gets blamed for exacerbating market selloffs is facing a challenge from the policy response to the pandemic. But fund managers said they are adapting, and new money is flowing in.

Most closely associated with investment funds such as Bridgewater Associates and AQR, the strategy, called risk parity, typically spreads risk over stocks, bonds and other financial assets, as against traditional 60-40 stock and bond portfolios where equities carry more risk. It uses leverage to magnify returns from lower-risk assets such as bonds.

But the U.S. Federal Reserve’s policy of keeping interest rates near zero in response to the coronavirus crisis has raised questions about the strategy. Bond prices, which move inversely to yields, have little room to rise and volatility has been generally low, which dulls Treasury bonds’ appeal, analysts and investors say.

Managers of risk parity assets said they are adjusting to the new reality, that the industry can thrive in a low-yield environment and investors can still benefit from the diversification it brings.

Bridgewater, which manages around $148 billion, told Reuters it has around 45 new commitments this year to invest money from existing and new clients. Many, it said, were in the $1 billion-plus range.

Investor demand has been “pretty constant,” said Bob Prince, Bridgewater’s co-chief investment officer, said recently.

Hakan Kaya, a senior portfolio manager at asset manager Neuberger Berman, which has more than $1 billion under management in risk parity strategies, also reported positive inflows. Kaya said he had made shifts such as rotating into assets like Treasury Inflation-Protected Securities.

AQR, which manages around $141 billion total, said with “all assets, including stocks, challenged by today’s low risk-free rate environment, we believe that the risk diversification of risk parity remains an excellent approach to portfolio construction.”

At least two major investors have decided to withdraw in recent months from risk parity, however, part of a trend which one pension fund consultant said was seeing large funds do their own diversification and seek higher yielding assets. The $34 billion Texas Permanent School Fund, for example, has mostly withdrawn, meeting records show.

Reported by Megan Davies and Maiya Keidan

Sourced Reuters

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