A follow up to a follow up from my Twitter discussion with Adam Butler. When I said that I just don't see risk parity working in a fund wrapper, Adam replied "any reason why you think risk parity doesn’t work in funds? AQRIX, ABRIX etc. Managed futures are just a form of risk parity conditioned on trend."
I didn't look up those two symbols right away. I also told Adam that I didn't understand the comment about managed futures as a form of risk parity in the way he was framing it. Tonight I looked up those symbols, Invesco Risk Balanced Allocation (ABRIX) and AQR Multi-Asset (AQRIX) which are both in the tactical allocation category. If click through to the link for each fund at mutualfund.com it does look like they are risk parity funds. Don't let the minimum investment to AQRIX throw you, that just the one class of the fund.
Adam's Tweet about them makes it seem like those two have been working. Ok let's see. First YTD. I threw in the S&P 500 as well as QAI which is a hedge fund, multi-strategy replication ETF that has been around for a while.
They are all down much less than the S&P 500. In isolation, that is a positive. Now here's the last 5 years of the bull market. They all lagged a lot with QAI being the worst performer.
In the bull market, ABRIX and AQRIX gained about 40% of what the S&P 500 did and in the bear market so far, QAI is doing the best and ABRIX and AQRIX are down about 60% of what the S&P 500 is down.
Sometimes you'll see risk parity associated with being all weather. I don't think these meet that definition. Using terminology we use here occasionally, should these be thought of as 75/50, seeking 75% of the upside with only 50% of the downside. In evaluating that question, I would not focus on getting exactly 75/50 as opposed to capturing the general effect which is subjective to the end user.
Are the 5 year numbers and the YTD numbers good enough in your estimation to be proxies for 75/50. I don't think they do. Maybe five years is too short so here's ten years.
They returned about 1/4 of the S&P 500.
What about as a replacement for more typical bond exposure that you might capture from a fund tracking the Bloomberg Aggregate Bond Index?
Well ok, now we're talking...sort of. Better returns during the bull market but the standard deviations are higher as are the max drawdowns.The long term numbers would improve for AQRIX adding in 2022 with that fund down less than AGG while ABRIX is down in line with the AGG.
If ABRIX and AQRIX are down a similar amount to the AGG in the worst bear market for fixed income in 40 years, is that good enough for you? No wrong answer, is that good enough protection for you?
I feel like I've lucked out finding the alts I've found and that they've mostly lived up to the expectation I think they were setting. Some set the expectation of going up when stocks go down and they've done that. Some set the expectation of being a horizontal line no matter what and that's what they've done. Of course gold is a stand out exception, down a little less than 9% YTD in during a serious drawdown for equities. Gold has the tendency to zig when equities zag but that hasn't been the case this year.
Expecting risk parity (the leveraging up to buy bonds kind) to be all weather-ish might be unfair or incorrect but if it's not all weather, then what is it? I'm not willing to commit client or personal money (after test driving RDMIX) to figure it out.
No comments:
Post a Comment