We spend a good bit of time looking at risk parity, trying to see if it can work in a retail accessible fund. There aren't too many of them and they don't seem to work very well. When I say work, I mean do what an investor would hope it would do, I don't necessarily mean accurately track the thing it is supposed to track because most of the ones that don't work are tracking correctly. And looking at the history of the few risk parity funds, it is hard to believe any of them are doing what an investor would hope they would do.
The Wealthfront Risk Parity Fund (WFRPX) is closing to new money as of 12/27/2024 and expects to be liquidated on January 3rd. It's a $1.3 billion fund charging 25 basis points. The fee seems pretty fair but the performance has been bad, compounding negatively by a few basis points.
Invoking a recently found term, the risk parity funds seem to be a form of uncompensated complexity. Even RPAR, compounding at 2% in an 8% world for VBAIX has struggled. RPAR has 70% in treasuries although not all of them are long term. You can see on the backtest, RPAR fairing worse than VBAIX by almost 600 basis points in 2022 and then didn't really come back the way VBAIX did.
Risk parity is a good example of a great story. It sounds very sophisticated and that plays to ego, I get it. The funds came out when rates were extremely low meaning prices were high. Leveraging up, which it what risk parity does, it leverages up on bonds, when prices are close to or at all time highs is very risky and it turns out, there were serious consequences for that risk in 2022. Before then, RPAR tracked VBAIX pretty closely. WFRPX did well in 2019 but lagged VBAIX by a lot in every other year of its existence.
It is easy to get carried away with overly sophisticated strategies bundled into funds. I believe in these conceptually but I think it is important to keep exposures small, be appropriately skeptical and diversify your diversifiers.
On a personal note, I've been particularly busy for a few days, nothing bad, and hope resume normal blogging shortly.
The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.
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