A breed of quant investor that spreads bets across assets is reeling this week as the hawkish monetary era intensifies.
The synchronized slide across stocks, bonds and many commodities following the Federal Reserve meeting hammered the investing approach known as risk parity. The strategy, made famous by Bridgewater Associates founder Ray Dalio, divides a portfolio across assets based on the perceived risk of each. It tends to rely on government debt to hedge equity declines, so can suffer in a broad selloff.
The Fed kept rates on hold at its latest gathering, but updated quarterly projections showed 12 of 19 officials favored another hike in 2023. Rising rates are double problem in markets, since they put the brakes on economic activity and undermine the current value of many assets. “During the 2021 boom, everything rallied together — some called it the ‘Everything Bubble,’ with lower rates contributing to higher stock and asset price values,” said George Cipolloni, portfolio manager at Penn Mutual Asset Management. “What we are seeing on the downside, in my opinion, is simply the unwinding of that.”
RPAR closed 2.1% lower on Thursday, while UPAR slumped 3.1%. The S&P Multi-Asset Risk Parity Index fell 1.5%.
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