Assessing the Risk in Risk Parity

Featuring Adam Butler, Rodrigo Gordillo and Michael Philbrick

Adam Butler, Rodrigo Gordillo and Michael Philbrick from ReSolve Asset Management outline the true basis behind Risk Parity strategies and the diversification they provide. In a timely presentation, the team from ReSolve address some of the misconceptions and extreme views about the ability of Risk Parity to perform in a rising interest rate environment. Filmed on May 1, 2017, in Toronto.

Published on
11 May, 2017
Topic
Portfolio Management, Risk Management, Investment Framework
Duration
46 minutes
Asset class
Commodities, Equities, Bonds/Rates/Credit
Rating
51

Comments

  • AC

    Adam C.

    10 6 2017 03:44

    0       0

    This is a great intro into risk parity and the ReSolve team is clearly at the forefront of constructing RP portfolios. IMO, the elephant in the room is that leveraged RP portfolios just aren't accessible for the average retail investor

  • MB

    Matthias B.

    23 5 2017 20:07

    0       0

    similar Qs the likes Gordon S. asked, would be great to get a feedback from the guys. Tks!

  • MB

    Matthias B.

    23 5 2017 20:06

    0       0

    I was reading the comments first so had rather low expectations although I was very happy to finally get more insight on RP; I thought it to be quite helpful but of course would have similar Qs on lev

  • IA

    Ibrahim A.

    19 5 2017 12:51

    0       0

    One question, for the equity equivalent volatility portfolio, is the max draw down at portfolio level or equity level? If at portfolio level, the 30% + max draw down is actually an equity level draw down of 90%+?

  • DR

    David R.

    16 5 2017 16:11

    2       0

    I know I'll be repeating some comments below, but I think the failure of ReSolve to provide their assumptions and trading mechanics makes this a less than useful risk parity staring point. And, as I noted below, I think it may be misleading as to the actual benefits over a 60/40 portfolio.

    1. At one point, your portfolio is leveraged 2:1. Later in the presentation it is 3:1. I would have preferred consistent leverage throughout.
    2. How is this not a "volatility parity" portfolio? And is volatility really risky?
    3. How much of your returns are driven by interest received from long dated treasuries? For that matter, what treasuries are you buying and when?
    4. Are you rebalancing? How often are you rebalancing? Are those decisions mechanical, or discretionary to create the preferred results? What are the costs and tax drag vs using a portfolio with fewer assets classes and annual rebalances?
    5. In the 1980s, did you really own EM debt? If so, what percent would have defaulted (as EM debt then was Latin America)?
    6. Are you borrowing on margin? What are your costs? How are you avoiding margin calls?
    7. Pulling data from Alpha Architect, a 60/40 portfolio with monthly rebalances generated a CAGR of 11.21% from 1/1/1979 to 12/31/2014, with a Sharpe Ratio of 0.64 and max drawdown of -28.12%. (All dividends and interest reinvested, gross of taxes and trading costs.) So please tell us how you got your results.

    • DR

      David R.

      16 5 2017 16:11

      1       0

      Sorry about the formatting. I though I was leaving spacing.

  • MC

    Minum C.

    14 5 2017 14:12

    0       0

    Very helpful. Thank you.

  • CL

    Chewy L.

    13 5 2017 23:28

    0       0

    Very good primer on risk parity.

  • DS

    David S.

    13 5 2017 20:04

    2       0

    I would rather have a portion of my portfolio in your model when the S&P P/E ratio is not at 25 with so many companies being disrupted. I do not know how long working baby boomers will continue to throw money at ETFs, but it must stop sometime. DLS

  • SM

    Sam M.

    13 5 2017 15:35

    2       0

    Doesn't make me feel better about the parity strategy, just further highlights the risk that many have been concerned and vocal about recently. Also unless I'm misunderstanding something here, comparing 3:1 leveraged portfolio to buying companies that have 3:1 in debt makes no sense. Like really? But I'm not a professional so maybe I just don't get it.

  • AH

    Andreas H.

    13 5 2017 12:23

    0       0

    like it, learned a lot!

  • AA

    Ali A.

    12 5 2017 17:04

    3       0

    Risk. What is the definition of risk. Volatility?
    My measure of risk is the probability of permanent impairment of value. Volatility is driven by too many other factors, a large one of which is liquidity.

  • rm

    russell m.

    12 5 2017 06:23

    0       0

    i can imagine doomsday scenarios where there are no bids and i'm a forced seller. still seems like a levered clusterf**k to unwind.

  • SP

    Steve P.

    12 5 2017 06:16

    4       2

    These guys have done a lot of work on this - an extremely interesting concept and one that challenges the thinking somewhat. Some of their charts are very insightful - look at the role gold occupies in 3 of the 4 possible future economic scenarios. I'd suggest to all those that give it a thumbs down to do a little research and bring yourselves up to speed on the concepts presented. It's obviously not a topic that the average investor can immediately grasp; it appears that those who don't understand it, vote it down. Schools in guys - learn and prosper from it!!

    • sm

      stephane m.

      14 5 2017 18:01

      1       0

      Personnaly I didn't gave any thumb on this one. I don't like the 26% drawdown. It's not my cup of tea to do just a little bit better than the market! But I understand that for some investor, it's a superior strategy than buying the market...

  • MA

    Mikael A.

    12 5 2017 04:18

    4       1

    Too much of a sales pitch compared to previous amazing unbiased videos here at real vision.

  • MA

    Mikael A.

    12 5 2017 03:55

    2       1

    Obviously its been genius to borrow short and lend lomg term in bonds the timeperiods the video goes through. It does not say anything about how that startegy will perform the coming 100 years.

  • dn

    david n.

    12 5 2017 01:15

    3       1

    I'll take Grant's brilliant interview with Chris Cole
    of Artemis Capital over this presentation any day!!

  • GS

    Gordon S.

    11 5 2017 18:24

    3       0

    Thanks a lot for the in depth presentation. I have a few questions and would really appreciate some additional input.

    1) How dynamic is your portfolio, i.e. how often is leverage adjusted and over what time frames are asset variances and correlations calculated and updated?

    2) How much are ETFs used in your strategies? I guess the main concern of investors is the overall concentration in passive investment strategies and here the pie probably looks a lot bigger (and growing everyday).

    3) What kind of data is used for backtesting? In particular for stocks? The whole universe or based on indices?

    4) What is the cost base for the leverage? I.e. what interest is payed on the loan for the leverage; now and assumed for the backtesting?

    Thanks a lot for any response!

  • SV

    Steven V.

    11 5 2017 17:42

    0       1

    How do your risk parity models compare to the Black-Litterman models?

  • PD

    Paul D.

    11 5 2017 13:41

    0       0

    A little dubious that the risk parity vs US balanced portfolio example is taken back to 1928 - was that just far enough back to produce the largest possible drawdown for the balanced portfolio??

    • MP

      Michael P.

      11 5 2017 14:24

      3       1

      Could only get solid data to 1924 and needed four years to establish a correlation estimate before creating RP portfolio. Downside comparison is only a very small point of the many aspects of RP we wanted to demystify in this presentation. Hopefully, we were successful in achieving that :)

    • PD

      Paul D.

      11 5 2017 14:46

      1       1

      Thanks for the reply. Possibly, but it is difficult to accept the validity of the analysis given the vast majority of it is taken from a period where RP did not exist. Still, that's not your fault, that's just the way it is.

  • jh

    john h.

    11 5 2017 13:34

    0       0

    where is the transcript?

  • Nv

    Nick v.

    11 5 2017 11:39

    5       0

    Excellent presentation. Thank you

  • CD

    Chris D.

    11 5 2017 10:21

    14       6

    Optimal portfolio (2017-2030): Gold. Diversify with silver, bitcoin, farmlamd and cash (of different currencies). Clue: assets outside of the traditional banking system. Buy - hold - prosper.

    • SV

      Steven V.

      11 5 2017 16:27

      8       0

      The RV portfolio.

    • IA

      Ibrahim A.

      19 5 2017 12:30

      0       0

      I find the 3:1 leverage on a risk parity portfolio is comparable to leverage in a 100% equity portfolio is very misleading. The leverage on corporate balance sheets does not make my portfolio susceptible to margin calls due to market volatility however the leverage on the risk portfolio does. Added to that, the risk parity portfolio has an allocation to equities, so even that allocation's leverage is being amplified as per your reasoning of corporate leverage.

      If you go on Bloomberg and chart the net performance of the Vanguard 60/40 ETF and compare it the net performance of the likes of All Weather, you will find the performance to very similar particularly over the last decade.

      Lastly if you go and read the disclaimer at the start, the performance is expressed in CAD not USD. This should have been made more obvious.

      Another Risk Parity Manager relying on opacity and fancy presentations.