Explaining Today’s Market Action (Hint: Blame Risk Parity)

Jon Alternative Media, Blogosphere, Economy, Market Commentary

‘You have to pick your poison — more risky assets or a more balanced basket with high leverage… There’s a philosophical
underpinning on why risk party has worked and why it should continue to work… Every time people talk about it as a leverage bond
portfolio, I just cry…. It’s not leveraged bonds. It’s a leveraged portfolio. ‘
–Edward Qjan of PanAgora Asset, who ‘coined’ the term ‘Risk-Parity’
Risk-parity 101: Leverage historically ‘low volatility’ asset classes (e.g. fixed income) / subsectors (utilities) alongside historically ‘higher volatility’ assets (stocks, EMFX, or the tech sector) to better ‘balance’ your multi-asset portfolio’s risk-allocation (which in a 60/40 equity/bond portfolio would see 90% of ‘risk’ concentrated on the equities side). Net / net, the strategy uses leverage to allocate ‘risk’ instead of allocating assets for diversification. Different parts of the economic cycle see different underlying asset class allocations (i.e. the current ‘low growth, low inflation’ backdrop), and now you’re cooking with grease – an ‘all weather’ portfolio, ahem.
Me, last month in ‘RBC Big Picture:’

This post was published at Zero Hedge on Oct 4, 2016.