Original post:
From Cliff's Perspective:
Risk Parity Derangement Syndrome
You may have noticed the market turbulence lately. You may have also noticed the legion of commentators among the media, politicians, and famous investors, blaming this turbulence on “risk parity,” “trend-following strategies,” or my favorite, just “the machines.”Update: "A Mini-Mea Culpa: Cliff Asness and Risk Parity"
Poppycock. Yes, it’s come to this; they’ve driven me to swear like Mrs. Doubtfire.
To be clear, it’s not unreasonable to think that strategies that target volatility in a long-biased portfolio are likely to sell into the higher market volatility that often coincides with market losses. Nor is it unreasonable to think that strategies that explicitly follow trends are likely to sell into bear markets (that’s kind of obvious). So I guess they get the direction right. But, size matters. To make a statement about this you have to have a vague idea about how many dollars are in such strategies and what they are likely to sell in a down draft. You may notice a conspicuous lack of relevant estimates from the many “machine” haters. This isn’t surprising because the facts show “the machines” can’t possibly be the culprit....MORE, including a couple interesting links
