2/8/18, 6(53 AM Is This Obscure Wall Street Invention Responsible for the Market Selloff? - WSJ Page 1 of 3 https://www.wsj.com/articles/is-this-obscure-wall-street-invention-responsible-for-the-market-selloff-1518085802 The surge in market volatility this week, after a long period of tranquility, left investors seeking a culprit. Critics began pointing to an obscure investment strategy pioneered by the world’s largest hedge fund, Bridgewater Associates. So-called risk-parity funds aim to reduce the danger from a collapse in any one market by limiting bets on more volatile assets like stocks and commodities and using leverage to load up on safer assets like government bonds. When volatility jumps, that leverage can in theory force the funds’ automated trading strategies to dump those assets, accelerating the selloff. But some risk-parity strategies outperformed the broader market as the Dow Jones Industrial Average plunged more than 1,800 points over two days and Wall Street’s “fear gauge,” the VIX, on Monday more than doubled in its largest one-day move in history. Some leading risk-parity fund managers said they haven’t traded much during the past several days, arguing they would pare positions gradually, not all at once, if necessary. AQR Capital Management LLC co-founder Clifford Asness said his funds were performing as expected even during the frenzy in stock and bond markets. “We have done pretty much no trading in risk parity” since Friday’s stock fall, Mr. Asness said in an interview. Michael Mendelson, a principal at AQR, added that risk-parity strategies will decline when “everything is down,” but that the current shake-up has been too short-lived for there to be any meaningful trading by risk-parity managers. DOW JONES, A NEWS CORP COMPANY DJIA Futures 24637 -0.40% ▼ Stoxx 600 376.95 -0.84% ▼ U.S. 10 Yr -1/32 Yield 2.831% ▼ Crude Oil 61.29 -0.81% ▼ Euro 1.2239 -0.21% ▼ This copy is for your personal, non-commercial use only. To order presentation-ready copies for distribution to your colleagues, clients or customers visit http://www.djreprints.com. https://www.wsj.com/articles/is-this-obscure-wall-street-invention-responsible-for-the-market-selloff-1518085802 MARKETS Is This Obscure Wall Street Invention Responsible for the Market Selloff ? Risk-parity funds, which balance portfolios based on the volatility of assets, were blamed for the price swings, but some outperformed the broader market Clifford Asness, co-founder of AQR Capital Management LLC, said the firm’s risk-parity funds performed as expected during the frenzy in stock and bond markets. PHOTO: CHRIS GOODNEY/BLOOMBERG NEWS Feb. 8, 2018 5:30 a.m. ET By Corrie Driebusch and Rob Copeland
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2/8/18, 6(53 AMIs This Obscure Wall Street Invention Responsible for the Market Selloff? - WSJ
Page 1 of 3https://www.wsj.com/articles/is-this-obscure-wall-street-invention-responsible-for-the-market-selloff-1518085802
The surge in market volatility this week, after a long period of tranquility, left investors seeking
a culprit. Critics began pointing to an obscure investment strategy pioneered by the world’s
largest hedge fund, Bridgewater Associates.
So-called risk-parity funds aim to reduce the danger from a collapse in any one market by
limiting bets on more volatile assets like stocks and commodities and using leverage to load up
on safer assets like government bonds. When volatility jumps, that leverage can in theory force
the funds’ automated trading strategies to dump those assets, accelerating the selloff.
But some risk-parity strategies outperformed the broader market as the Dow Jones Industrial
Average plunged more than 1,800 points over two days and Wall Street’s “fear gauge,” the VIX,
on Monday more than doubled in its largest one-day move in history. Some leading risk-parity
fund managers said they haven’t traded much during the past several days, arguing they would
pare positions gradually, not all at once, if necessary.
AQR Capital Management LLC co-founder Clifford Asness said his funds were performing as
expected even during the frenzy in stock and bond markets.
“We have done pretty much no trading in risk parity” since Friday’s stock fall, Mr. Asness said
in an interview. Michael Mendelson, a principal at AQR, added that risk-parity strategies will
decline when “everything is down,” but that the current shake-up has been too short-lived for
there to be any meaningful trading by risk-parity managers.
DOW JONES, A NEWS CORP COMPANY
DJIA Futures 24637 -0.40% ▼ Stoxx 600 376.95 -0.84% ▼ U.S. 10 Yr -1/32 Yield 2.831% ▼ Crude Oil 61.29 -0.81% ▼ Euro 1.2239 -0.21% ▼
This copy is for your personal, non-commercial use only. To order presentation-ready copies for distribution to your colleagues, clients or customers visithttp://www.djreprints.com.
Is This Obscure Wall Street InventionResponsible for the Market Selloff?Risk-parity funds, which balance portfolios based on the volatility of assets, were blamed for theprice swings, but some outperformed the broader market
Clifford Asness, co-founder of AQR Capital Management LLC, said the firm’s risk-parity funds performed as expectedduring the frenzy in stock and bond markets. PHOTO: CHRIS GOODNEY/BLOOMBERG NEWS
Feb. 8, 2018 5:30 a.m. ETBy Corrie Driebusch and Rob Copeland
This copy is for your personal, non-commercial use only. To order presentation-ready copies for distribution to your colleagues, clients or customers visithttp://www.djreprints.com.