I am the one who knocks


A “Bad Day” Looms For Popular Hedgies

in Credit/Equities by

What did we say last week in our popular post “Bridgewater Thanks You For Your Service, But They’ll Be ‘Renovating’ You Soon“?

Don’t remember? That’s ok, we’ll remind you:

“Oh, and get this all wrapped neat and tight before cross asset correlation relegates risk-parity to annals of hedge fund history.”

Yeah, well check this out, from Goldman:

“The bond sell-off since last week illustrates this: equity/bond correlations have increased sharply (Exhibit 4). This likely led to a day of very poor returns for traditional balanced funds and risk parity portfolios: the latter have likely suffered more, as the significant decline in equity volatility over the summer has likely led to increased equity allocations. Exhibit 4, which shows daily returns of a simple risk parity portfolio (using 3-month volatility to scale weights), suggests that they would have had a similarly bad day recently to during the ‘taper tantrum’, ‘Bund tantrum’ and the two China/commodities drawdowns (August 2015, December 2015). Performance pressures in the event of a pick-up in volatility and correlations could drive more de-risking from risk parity investors and vol target funds.”


(Charts: Goldman)

Ummm, yeah. We’ve been warning about this for how long now?


Leave a Reply

Your email address will not be published.


Latest from Credit

Go to Top