Risk Parity: The Dog That Did Not Bite
by Clifford Asness, Ph. D. AQR Capital Management, Inc.
Following August equity market volatility, commentators have been lining up to blame risk parity as a driving force behind that volatility. As Iāve said before:Ā I canāt define short-term silliness, but like Justice Stewart I can identify short-term silliness when I see it. This recent rush to use risk parity as a pin cushion is just another case of such silliness.
Some colleagues who lead our risk parity strategies here at AQR explain. Why isn't risk parity the cause?Ā Well, we believe risk parity simply isnāt big enough to generate the level of trading necessary to create very large market gyrations and most certainly not to the degree witnessed recently.
A more parsimonious explanation, though Iād agree a far less newsworthy one, is simply that investors got more negative on economic fundamentals in August and re-priced assets and rebalanced their portfolios accordingly. I guess thatās a more boring story than āRisk parity man bites marketā...
This post was originally published at AQR Capital
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