Bridgewater: Our thoughts about risk parity and all weather

Our thoughts about risk parity and all weather

by Ray Dalio, Bob Prince, and Greg Jensen, Bridgewater Associates

Since there has recently been a controversy about risk pa rity, since we were responsible for coming up with the idea, and since we now manage more of it than any ot her firm, we feel a responsibility for answering people’s questions about it. Finding out what is true is a two-way responsibility. Ours is to honestly convey what we believe is true and yours is to probe us hard and openly so that we can work together toward learning what’s true. Then, after we have had this quality exchange, we can each decide what we believe is true and what to do about it.

How did you come up with risk parity?

In 1990 Ray had acquired enough money to form a trust to take care of his family beyond him. He had learned that making tactical asset allocation moves successfully depended on the skills of the people who made them, that it was very difficult to discern who would make m oney from who would lose it, and that the strategic asset allocation decision was the most important decision. He had also seen wealth destroyed by supposedly great investors during periods of high inflation and depressi ons that periodically hit every country. Because Ray believed that he could not trust his trustees and the people they picked to make those asset allocations well, and because he believed that the basic laws of investing were timeless and universal, he set out to create a timeless and universal strategic asset allocation mix—i.e., one that would have worked well goin g back 100 years or more and that would have worked in all economic environments including most extreme ones, such as the US Great Depression (deflationary) in the 1930s and Germany’s hype r-inflationary depression in the 1920s. Before he actually designed this mix he pretty much knew how it would work based on what he had previously learned about what drives market movements, especially what driv es relative movements of markets. In the early-1990’s he worked with Bob Prince to develop the All Weather a sset allocation approach, which was the first risk parity portfolio, and in 1996 he and his family trusts invested in it . In 2003 he showed it to his institutional investment clients and many of them decided to join him. Si nce then, Greg Jensen and several other Bridgewater researchers have joined Ray and Bob to refine the process. Ray and his tr usts still have the preponderance of their money in Bridgewater’s All Weather products.

What is risk parity?

Risk parity is the means of adjusting the expected risks and returns of assets to ma ke them more comparable. This is done for the purpose of creating a better diversif ied portfolio that will have a better return-risk ratio than would otherwise be possible. Once the better diversif ied portfolio is created and the return-risk ratio is improved, the portfolio can be geared to the desired level of risk and return.


Our Thoughts About Risk Parity and All Weather

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