Risk-parity strategies that aim to maximize diversification across asset classes appear to have lost their appeal at a time when every asset class has suffered due to persisting global volatility.
What Happened: The $1.1 billion RPAR Risk Parity ETF (NYSE:RPAR) has lost over 32% from its November 2021 high, according to a Bloomberg report. This is a record drawdown, the report said.
The fund has lost more than 28% since the beginning of the year.
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Based on volatility, these strategies allocate funds among all asset classes, taking an equal amount of risk in each. However, risk parity tactics failed this year as both stocks and bonds suffered from the U.S. Federal Reserve‘s aggressive rate hikes in its effort to control inflation.
Expert Take: Todd Sohn, ETF strategist at Strategas Securities, told Bloomberg it’s supposed to be a diversified fund — holding major asset classes: stocks/bonds/gold/TIPS, to basically ‘weather’ when volatility hits one of the asset classes.
“But we are in this environment with inflation still high and bond yields now making multi-decade highs that no one has experienced in 40 years,” Sohn said.
Jeffrey Gundlach, chief investment officer of DoubleLine Capital, tweeted, “The Nasdaq Total Return YTD is -30.36% and The Long Maturity UST ETF is -30.94%. “Risk parity” is clearly not working out so far this year.”