‘Low- Vol’ Quant Strategies Suffer Vol Explosion Amid Commodity, EM Collapse

Amid the chaos and uncertainty of our ever-changing world of tweets, threats, and actions, seeking the safe-haven of so-called “low-vol” or “all-weather” portfolios makes sense right? Wrong!

While levering up long bets on the most-levered and worst-balance-sheet companies has paid off dramatically, Bloomberg’s Dani Burger reports that risk-parity funds – designed to be diversifiers of risk based on volatility changes – are among the worst-performing strategies in 2018 tracked by JPMorgan.

Burger  notes that the commodity train wreck, emerging-market turmoil and shifts in government bonds have created a wave of turbulence in quant strategies this year…

As long-term correlations break-down and resume as if they were penny stocks themselves.

From the trade clash to extreme moves in developing assets,  Burger points out  that portfolios have struggled to find shelter so far this year, with turmoil in metals the latest in a list of stresses.

No one’s saying risk parity is broken. Proponents say the strategy can sustain bouts of underperformance — by design, it captures the average return across assets, so it can outperform in the long run.

“Everyone’s performance has been soft this year relative to U.S. stocks,” Roberto Croce, director of quantitative research at Salient Partners LP.

“Risk parity is trying to be in the middle, trying to get diversification. It’s never going to be the top-performing thing, but it won’t be the bottom either.”

But for now, it means that because the funds have modest allocations to some of the riskier markets, they haven’t harvested the best returns on offer this year, generated by U.S. stocks. Maneesh Shanbhag, who co-founded Greenline Partners LLC after almost five years at Bridgewater Associates LP, concurs.

“Equities came off low valuations to deliver higher returns,” he said. “Now, risk parity looks relatively dull but has delivered what it was supposed to.”

The only managers to fare worse that Risk-Parity funds this year are trend-chasing commodity trade advisers, or CTAs.

Read more here…

Finally, Burger sums it all up in four simple words: “no quant is safe.”

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Author: Tyler Durden