“As volatility has risen, many of these funds have had to de-risk systematically,” said Vineer Bhansali, CIO of LongTail Alpha, who has written on risk parity asset allocation. “And as correlations between stocks and bonds have flipped from negative to positive, they have had to de-lever more.”
The pain at AQR, which is based in Greenwich, Connecticut, has been widespread. Of 40 AQR mutual funds, only five had positive returns this year through Dec. 5, according to data compiled by Bloomberg. The firm’s $7.7 billion AQR Managed Futures Strategy Fund is down 9 percent for the year.
Changed Strategy
While the original prospectus for the AQR Risk Parity Fund said it “follows a risk parity approach,” the document for the renamed fund says it will seek to allocate in a way that “avoids excessive risk exposure to any single asset class.” The new prospectus omits any mention of risk parity in the description of the fund’s principal investment strategies.
The fund also replaced its annualized volatility target of 10 percent with a broader range of 7 to 13 percent. That frees AQR from having to automatically rebalance its portfolio when volatility spikes for one of its asset classes, such as bonds. In another change, the fund will be able to bet against individual securities that it expects to decline; the prior strategy generally only used short-selling to hedge, according to the SEC filing.
“We are probably going into a much more uncertain environment,” said Hakan Kaya, a senior portfolio manager in the risk parity and commodities fund unit at Neuberger Berman Group. “That is why we are still believers in risk parity.”
AQR’s rebranding and altered strategy take effect on Jan. 30.
This article was provided by Bloomberg News.