October 17, 2016
Recently, Robin Wigglesworth of Financial Times wrote an interesting article about some automated systematic investing strategies being pursued by institutions that add to the volatility in the stock market. These strategies maintain a certain level of volatility in the portfolio. When the stock market declines and the volatility pierces the threshold or range, there is instant, automated selling to bring down the exposure, and consequently volatility, into the predetermined range. The article estimates there are about $600 to $800 billion in such risk-parity and volatility-targeting investment strategies in the stock market.
Thus, these strategies extend or widen the declines during a pullback in the stock market.
The article can be read here at FT website, although a subscription may be required.
An excerpt follows:
October 14, 2016
Dwight D. Eisenhower once observed that “the search for a scapegoat is the easiest of all hunting expeditions”. When financial markets suffer one of their periodic wobbles, many analysts and investors these days instinctively train their guns at a strategy called risk parity.
Risk parity funds are enticingly faceless, modern-era bogeymen. Although they come in many forms and flavours, they are in essence passive, systematic and computer-controlled vehicles that weight their investments equally across asset classes according to their mathematical volatility, applying leverage on the various components to ensure “parity”. In theory this ensures a well-diversified portfolio that should over time perform in most market environments.