Risk Parity Investors Concerned About Performance
By DailyAlts Staff Risk parity strategies are designed to perform irrespective of general market conditions, but this doesn’t mean that they’ll always outperform – not even during a downturn. The global swoon that began when China devalued its currency in mid-August and picked up steam through the latter part of that month and into September left a lot of risk-based portfolios battered and bruised – and this isn’t what their risk-conscious investors had in mind. In fact, according to Chief Investment Officer’s 2015 Risk Parity survey , 42% of risk-parity investors are “quite” or “extremely” concerned about performance – no other concern, from use of leverage to peer risk to transparency – comes close. And as a result of these concerns, just 19% of respondents said they planned to increase their risk-parity allocations in the next 12 months, while 16% said they planned on decreasing their allocations. About the Survey Respondents CIO’s survey involved 93 risk-parity investors from the U.S. (74%), Europe (18%), Canada (4%), and other countries (5%). Forty-seven percent had assets of more than $15 billion, while 23% had assets between $5 and $15 billion, and 24% had between $1 and $5 billion. Small users – those with less than $1 billion in assets – accounted for just 5% of respondents. Corporate pension funds were a plurality of respondents at a 37% share, while public pension / sovereign wealth funds and endowment and foundations represented 17% and 10%, respectively. Thirty-five percent of respondents were categorized as “other.” Investor Concerns Only 13% of respondents said they were “not at all” concerned about risk-parity performance, while 21% said they were “extremely,” 21% “quite,” 23% “moderately,” and 23% “a little” concerned. By comparison 62% said they were “not at all” concerned about there being “no explicit bucket” to put risk parity in, 50% were “not at all” concerned with “the passive approach some vendors take,” and 47% were “not at all concerned” that there “are not enough viable manager offerings.” Zero percent of respondents said they were “extremely” concerned about peer risk – compared to 21% for performance. To say performance is the major concern of risk-parity investors is an understatement. Allocating to Risk Parity Fifty-three percent of respondents said they fund risk parity from their equities “bucket,” making it the most popular answer. Interestingly, 24% said they have a dedicated allocation to risk parity – up from just 18% the prior year. Nineteen percent said they funded risk parity from their alternatives bucket, which was down from 25% in 2014. The bigger the investor, the more likely they were to have a dedicated risk parity bucket: Among respondents with over $5 billion in assets, 29% had dedicated allocations; while only 14% of respondents in the $1 billion to $5 billion group and zero-percent of the sub-$1 billion group funded risk parity from a dedicated bucket. These smaller investors funded risk parity from their equity and fixed-income buckets by a ratio of two-to-one. A plurality of respondents said they used an absolute return benchmark, i.e. “T-bills +x%.” This response grew in popularity from 25% in 2014 to 37% in 2015 – while using the traditional “60/40” portfolio as a benchmark fell in popularity. Conclusion Some pundits seriously question whether risk parity may have helped bring down markets in August. According to CIO, the fact that the question is being taken seriously should “warm the hearts” of risk-parity investors, since the still-tiny strategy has successfully “seeped into the collective consciousness of Wall Street and the media that cover it.” In CIO’s view, risk parity is still too small to have caused much damage – but the increased awareness could be good for the strategy going forward.