Very interesting post on risk parity

Longshorttrader with interesting thoughts on risk parity:

  • Why is Ray Dalio making more media appearances than even Warren Buffett? Arguably, Cliff Asness too, though his/AQR’s appearances seem a bit more measured. Both seem highly defensive of risk parity. Why? If you’re in a position of strength, why be defensive? Does not pass the “sniff test”.

  • Why does Bridgewater “backtest” returns without factoring in the impact that their and other RP funds’ presence would’ve had on markets in those past periods?

  • Why is it that some obscure outfit called Renaissance Technologies seems to obsess over modeling expected profit potential of a strategy as a function of its size?

  • If Bridgewater and other RP funds’ AUM went to zero, would the world care? Would the world be any worse off?

  • Assume I am wrong. Examine the claims of the RP proponents.

  • Compare/verify/test the proponents’ claims with evidence.

  • How much AUM is dedicated to RP strategies? How much EXPOSURE do these funds have (i.e., how much leverage)?

  • The Leon Cooperman / Omega Advisor quotes regarding Risk Parity are a distraction…the reality and truth are perversely ironic. Time will reveal all.

  • Why should the immediate and more distant future resemble the past, when the immediate past and present wildly differ from most of history?

  • The best “risk-adjusted” way of implementing “Anti Risk Parity” will likely be quite…boring. Though immensely profitable.

I share his concerns. Although I used to admire Ray Dalio when I started investing more than ten years ago for the breath of his analysis and curiosity, I am much more sceptical of him now. I mean how serious can you take a guy who calls this,


a “beautiful deleveraging“…

And of course and as regular readers know, I fully disagree with him on China…

So what has happened to the combative, truth-seeking manager of ten years ago?

I think that Ray Dalio has to be very balanced in his public comments – a direct consequence of Bridgewater’s huge size. No doubt, he has many clients (sovereign wealth funds, pension funds, foundations etc.) who are very wary with whom they associate. As a consequence, he is obliged to balance a hundred considerations at once in every public appearance. His position is understandable from a profit-maximizing viewpoint, just be aware that the obligation precludes intellectual honesty (and don’t take his statements at face value)…




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