Conventional wisdom is that 2015 was a “narrow” year for the stock market, with only a few big stocks doing well, making active portfolio management more difficult. But the data show that 2015 was staggeringly normal.
The role of leverage in risk parity is often misunderstood. The willingness to use modest leverage allows a risk parity investor to build a more diversified, more balanced, higher-return-for-the-risk-taken portfolio. In our view, this more than compensates risk parity investors for the necessity of employing some leverage.
Recent reports claim that risk parity investors sold large amounts of equities during the most volatile times in August, contributing to — or even causing — share-price gyrations. In fact, risk parity sellers are not big enough to be significant players in the market correction.
Many of the current articles that are critical of hedge funds may be giving good advice, but for the wrong reasons.
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.