Tags: Risk | parity | funds | commodities

Risk Parity Funds Stage Comeback

By    |   Thursday, 10 Apr 2014 12:21 PM

Risk parity funds, designed to thrive in good economic times and bad, are rebounding after a mediocre 2013.

At a basic level, the funds seek to equally distribute risk among stocks, bonds and commodities to boost returns and limit volatility.

The first risk parity fund — "All Weather" — was launched by hedge fund manager Bridgewater Associates, led by Ray Dalio, in 1996.

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Risk Parity funds returned an average of 3.3 percent in the first quarter, according to Morningstar, CNBC reports. That performance bested stocks and bonds. The S&P 500 produced a total return of 1.3 percent in the first quarter.

Risk parity funds fell slightly in 2013 — 0.01 percent. Afterward, investors withdrew $1.45 billion from the funds in the first quarter, according to Morningstar.

"People lose sight of how well risk parity has done in the rebound," Lee Partridge, chief investment officer of Salient Partners, which manages a risk parity fund, told CNBC.com.

"It's kind of like pushing a beach ball under the water, and then the air that's in it just pops it right back up. That's what we're seeing right now."

However, some experts say that 2013 was a fluke.

"Last year was a perfect storm of bad market circumstances for risk parity funds," Josh Charlson, director of alternative funds research at Morningstar, tells CNBC.

Scott Wolle, chief investment officer of Invesco Global Asset Allocation and manager of the firm's risk parity fund, agrees.

"2013 was very unusual in the sense that both commodities and government bonds performed poorly while developed stock markets soared," Wolle notes. "Many people mistakenly attributed performance challenges solely to rising rates and ignored the headwinds from commodities. As a result, they vastly overestimate the effect of rates on the strategy."

Josh Charlson, director of alternative funds research at Morningstar, says investors should be cautious about risk parity funds.

"The recent rocky weather shouldn't cause investors to simply abandon ship, however, particularly if they invested in a risk parity fund for the right reasons in the first place," he writes on Morningstar.com. The funds help you diversify from a more traditional balanced fund, Charlson explains.

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Risk parity funds, designed to thrive in good economic times and bad, are rebounding after a mediocre 2013.
Risk, parity, funds, commodities
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2014-21-10
Thursday, 10 Apr 2014 12:21 PM
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