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