Future Finance
Risk Parity Trade Made Famous by Ray Dalio Is Now Ringing Alarms
- Risk-parity systematic strategies are enduring large losses
- Blame market meltdown, volatility jump, choppy stock-bond link
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A booming quant trade touted for its diversification appeal is starting to feel the pain in this once-a-decade explosion of volatility. It’s also raising scary questions about billions riding the tried-and-tested link between stocks and bonds.
Known as risk parity, the levered-investing method made famous by Ray Dalio allocates to an array of assets based on their volatility. Before this week, it had -- at least on relative terms -- outperformed in the turmoil, benefiting from its outsized fixed-income exposure.