It's ugly out there in Risk-Parity (RP) fund land as losses on bonds outweigh gains on stocks as correlations normalize (and volatility drops) echo the plunges experienced during 2013's Taper Tantrum. However, as RBC notes, adjustments to the leverage mechanism with RP strategies means, despite the carnage already, we may not have seen the cross-asset-class spillover yet.
The Trump Tantrum in RP stratgies is accelerating rapidly but remains less than the Taper Tantrum for now…
But while this looks disastrous, RBC's Charlie McElligott notes that adjustments in the Risk-Parity (RP) frameworks means that we have nto yet seen the big spillovers that many are expecting…
Risk-Parity fund performance (not great) definitely a talking-point right now, with regards to folks asking “when is the potential risk-asset / equities deleveraging going to ‘kick-in’?” as forced by the terrible fixed-income performance of late.
If grossly oversimplifying key inputs as ‘leveraged USTs,’ ‘stocks’ (SPX) and’ inflation-protected securities’ (TIP ETF), the funds simply aren’t getting relief from their asset mix. The trick here from speaking with my good friend Max Nelte in RBC GELP Structuring is that during prior periods of stress (i.e. the original Taper Tantrum in ’13) some of these funds will have shifted their traditional volatility ‘trigger’ for their leverage / risk mix to a more duration-adjusted measure, which in turn will dampen their leverage allocation, and thus, asset allocation (post-leverage).
So, we still might not get that ‘expected’ cross-asset ‘spillover’ which we’ve seen in prior (read: smaller) ‘rate tantrums’ of the recent past in this ‘immediate’ period.
That said, further performance challenges within fixed-income / EM / commodities and lack of a significant enough boost from equities and inflation-products may dictate a larger / more significant questioning of allocation size into RP strategies from real money investors, as there certainly looks to be a potent cocktail brewing for investors to redeem from the strategy if the struggle were to continue further. Simply needs to be monitored further…as do ALL bond fund flows, especially.
And the last time bond-stock correlation collapsed from such a positive extreme, things did not end well…
Finally, RBC's Charlie McElligott shows his LOL CHART OF THE DAY:
EQUITY FACTOR MKT NEUTRAL PERFORMANCE % MTD SHOWS INSANITY OF CURRENT QUANT ROTATION SINCE ELECTION:
Considering the scale of factor mkt neutral AUM, the leverage inherent in these strategies and the factor overlays at various other monstrous ‘long only’ asset managers…I’d say ‘this’ is behind a lot of the performance pain out there for fundamental managers.
The rotation in ‘size’ alone, with Russell 2000 (small cap) outperforming SPX (large cap) by 7.1% MTD, is just gutting funds who’ve been crowded into large cap (tech, for instance) due to scale issues – even those who might have had the sector selection correct.
And the end of the day – it’s still a ‘factor’ world… even if the nascent change from monpol to fiscal policy does in fact make a MASSIVE-difference with regards to prospects for active management going-forward (with the eventual removal of Central Banks as the determining input in asset pricing / removal of volatility suppression).
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