Ray Dalio’s $80 billion All Weather fund, designed to produce returns in most economic environments, fell 4 percent in August, according to a person with knowledge of the matter.
The so-called risk parity fund is Bridgewater Associates’ long-only product. It doesn’t hedge and instead seeks protection against market turmoil by investing in a combination of stocks, bonds and currencies.
Analysts have been blaming some risk parity funds and algorithmic traders for the extreme volatility in markets late last month that wiped out more than $5 trillion in global stock markets.
Steve Einhorn, vice chairman of hedge fund firm Omega Advisors, said in an interview last week that the selloff was caused by algorithmic and volatility traders, or managers of risk parity funds, none of whom pay much attention to the underlying health of individual companies.
“If you believe the selloff was not fundamental and you have good companies, you stick with them,” he said.
Analysts at Bank of America Merrill Lynch published a recent report that put the blame on risk parity funds that borrow heavily to make their bets and tie the amount of leverage they use on predictions of future portfolio volatility.
“Risk parity is not the risk, vol[atility] control is,” according to the report written by Chintan Kotecha and his team of equity derivatives strategists at the bank.
Bridgewater, which has $169 billion in total assets, according to its website, beat smaller risk parity funds including AQR’s $584 million mutual fund, which fell 5 percent in the month, and the $91 million Salient fund, which tumbled 6.5 percent. U.S. stocks, as measured by the Standard & Poor’s 500 Index, tumbled 6 percent.
Roberto Croce, director of quantitative research at Salient Partners, said people blaming risk parity funds for the stock dive got it wrong.
“No question we took down exposure to the stock market, but it was 5 percent over the course of the week,” he said in an interview.
Risk parity funds generally rebalance daily based on volatility, but the current day’s price movements aren’t weighed very much compared with historic price swings. “How much one day affects how much you rebalance is quite small,” he said.
None of the risk parity funds performed as well as some large hedge funds, which managed to make money or avoid losses.
Rubicon Fund Management, run by Paul Brewer out of London, posted a 10.7 percent gain last month in its global hedge fund, boosting year-to-date returns to 14 percent, according to investors.
Citadel’s two biggest hedge funds gained almost 1 percent in August and 13 percent this year, while Millennium Management was little changed that month and is up 9.6 percent this year. Lee Ainslie’s Maverick Fund made 1.5 percent in August and climbed 21.4 percent this year.
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