The gang at Bloomberg isolated a filing for the RPAR Risk Parity ETF to be managed by a former employee of Bridgewater Associates which is one of the more well known names in risk parity. Also involved in the proposed ETF is Toroso Investments and EQM Indexes.
We've talked about risk parity a few times over the years. The basic building block of understanding is that assets are weighted by their volatility (I realize risk and volatility are not the same thing, I am just giving the basics here) such that volatility is equal weighted. What this can look like in practice is much more exposure to bonds than equities often to the point levering up to get the same volatility out of the bond portion as the equity portion.
The strategy works often but of course no strategy can always be best. Another big player in the risk parity space is Cliff Asness and his firm AQR. AQR offers the strategy in a mutual fund wrapper and has you can see 2018 was a rough year for the fund.
I compared the risk parity fund which is QRHNX (there are a ton of different symbols so do that research if you think you might have any interest) versus the S&P 500 Index and AGFiQ Market Neutral Anti Beta (BTAL) which is a client holding. QRHNX is not an equity proxy but where risk parity is an alternative it makes sense to look to see whether it actually looks different than equities. BTAL is a different type of alternative strategy and so including BTAL allows for seeing how QRHNX stacks up against another alternative. I don't care that QRHNX and BTAL have much different strategies because as an end user I am going use the alts that I think will offer the most zig against the equity market's zag.
Cliff is prominent on Twitter and was very transparent about the struggles of risk parity while it was struggling, 2019 has obviously been a better year. According to the Morningstar page for QRHNX, the fund allocates 58% to equities and 266% to bonds (the leverage I was talking about). While I am sure there is a plan to mitigate risk if interest rates end up going higher, that is the risk to the strategy. There may be no visibility for higher rates but regardless of the outlook, every strategy has risk and you need to understand what it is if you're going to buy in.
There is risk parity ETF trading already in Canada; the Horizons Global Risk Parity ETF with symbol HRA in Toronto. Here is the two year chart compared to the S&P 500 and BTAL.
It also struggled in 2018. It is clear that the strategy is far less volatile than equities but it seems as though it has a higher correlation to the S&P 500 than BTAL (casual observation).
This final chat looks at HRA, BTAL, the Merger Fund (MERFX) in purple and QRHNX in yellow. MERFX is a long time client holding.
Despite the struggles of the AQR fund, the strategy can work. I will be curious to see how the new filing unfolds between now what could be a November launch (per the Bloomberg link). Bridgewater and AQR aren't so invested in it because the strategy sucks. I believe it can work and I believe in using alternatives so following this makes sense as a matter of investment process. I don't know whether I will conclude that the new fund is superior to anything else I have used as alternatives but it is possible and I owe it to clients to pursue it to a conclusion.
Now to the title of this post and the greatest thing I have ever seen.
The picture in the header of this post is of a Tomcar which is an Israeli UTV, the company also has a facility in Phoenix. Long story short, someone with a connection to the company has a place here in Walker and brought a Tomcar to our fire training on Saturday (I am the chief of one of the largest volunteer fire departments in the state of Arizona). It can be outfitted as a fire apparatus, there are some departments who've bought them for this purpose. Anyone whose read this blog for any length of time knows I take a lot of pictures of fire apparatus and desert racing trophy trucks (they are also called trick trucks). The Tomcar appears to be a cross between the two, hence the greatest thing I've ever seen. Keeping this part short, the Tomcar could easily hold 100 gallons of water with a small pump and serve as a combination hose tender/command vehicle with room for other equipment like hand tools, a medical bag, backpack pumps and a lot of hose. I am not sure if one of these babies is in Walker Fire's future but you never know and if this post makes it to anyone's radar at Tomcar, we're not above groveling.