In addition to Paul Tudor Jones making headlines overnight with his comments during a closed-door GSAM session, in which he warned that Yellen “should be terrified” by some of the market’s key valuation metrics, he went so far as to predict what trading strategist would blow up the market and cause the next crash when volatility returns.
‘Risk parity,’ Jones told the Goldman audience, ‘will be the hammer on the downside.’
PTJ is not the first one to blame risk-parity funds of crashing the market: Both Omega’s Leon Cooperman and especially JPM’s Marco Kolanovic famously repeated on several occasions that the greatest “crash catalyst” facing the market is, you guessed it, risk-parity.
The two have good reasons to be skeptical: as we first reported in September of 2015, it was a risk-parity meltdown in mid-August that catalyzed the ETFlash crash of August 24, 2015, sending the VIX so high, the CME admitted the calculation had malfunctioned and the VIX was offline for nearly an hour. This is what Bank of America reported at the time:
The volatile sell-off in global equities from Thursday August 20th through Tuesday August 24th, alongside a relatively muted diversification benefit from fixed income, led many risk parity funds to suffer a sudden and sharp drawdown over the four-day period (Chart 1). The performance drawdown and subsequent spike in the volatility of risk parity funds likely triggered a significant deleveraging in their assets.
This post was published at Zero Hedge on Apr 21, 2017.
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