Clearing up a misguided quibble over a previous post about the efficacy of the small-cap factor.
First, I must issue a disclaimer. This is for wonks already immersed in the factor literature. There's lots of inside baseball, assumed terminology, etc., in this one. I explain what I’m doing along the way, but rarely from scratch. If this stuff is brand new to you and you still understand it all you are way smarter than me (you are allowed to find that to be faint praise). There’s nothing more mathematical here than a regression model but there is lots of shop talk. So, if "factor wonk" doesn't describe you, you probably have friends and a social life, so that’s nice, but this piece won't make much sense (consider it even).
Critics seeking to attack risk parity don't have to go all tin-foil-hat crazy — blaming the strategy for the exceptional market volatility last summer. Instead, they could just do what people usually do, attack recent performance, because risk parity has undeniably been through a tough relative performance period of late. But we still believe in it as an alternative long-term strategic asset allocation that’s typically used to diversify a more traditional equity-dominated allocation.