(Bloomberg) -- A breed of quant investor that spreads bets across assets is reeling this week as the hawkish monetary era intensifies.
The synchronized slide across stocks, bonds and many commodities following the Federal Reserve meeting hammered the investing approach known as risk parity. The strategy, made famous by Bridgewater Associates founder Ray Dalio, divides a portfolio across assets based on the perceived risk of each. It tends to rely on government debt to hedge equity declines, so can suffer in a broad selloff.
The cross-asset declines handed the $926 million RPAR Risk Parity ETF (ticker RPAR) its worst day since December and sent the fund to its lowest in 10 months. A key gauge of the strategy suffered one of its biggest drops this year.
The Fed kept rates on hold at its latest gathering, but updated quarterly projections showed 12 of 19 officials favored another hike in 2023. Rising rates are double problem in markets, since they put the brakes on economic activity and undermine the current value of many assets.
US stocks slid the most since March following the meeting. The yield on 10-year Treasuries, which rises as the bonds fall, jumped the most in three weeks. A Bloomberg gauge of raw materials slid the most in more than a month.
“During the 2021 boom, everything rallied together — some called it the ‘Everything Bubble,’ with lower rates (and higher bond prices) contributing to higher stock and asset price values,” said George Cipolloni, portfolio manager at Penn Mutual Asset Management. “What we are seeing on the downside, in my opinion, is simply the unwinding of that.”
The selloff also handed RPAR’s younger sister fund its worst day since November. The RPAR Ultra Risk Parity ETF (UPAR) is an amped up version of its sibling that looks to boost returns with higher leverage.
RPAR closed 2.1% lower on Thursday, while UPAR slumped 3.1%. The S&P Multi-Asset Risk Parity Index fell 1.5%.
Risk parity strategies come in a variety of shapes, but because they generally target a certain level of volatility they are prone to unwind positions at times of turbulence. That gives them the potential to exacerbate price moves.
The Cboe Volatility Index, a measure of expected swings in the S&P 500, jumped the most since March on Thursday. The ICE BofA MOVE Index, which tracks expected Treasury volatility, climbed the most in a month.
Risk parity positioning across stocks and bonds has retreated in recent months, according to Parag Thatte at Deutsche Bank Research. “A sustained increase in volatility” would see systematic strategies including risk parity funds reduce exposure to both assets further, he said.
--With assistance from Lu Wang.
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