Markov Processes International

Chart of the Week: Update on Bridgewater All Weather

In recent weeks risk parity1 funds have been the focus of particularly unfavorable reports on their performance.  Bridgewater’s All Weather Portfolio, the original and most famous risk parity fund, is often held up as an example.

The risk parity approach has performed particularly well over the past decade, minimizing losses during both the tech bubble and the financial crisis, as observed in our earlier post on Bridgewater All Weather. As with any (relatively) new strategy it has yet to prove itself outside of simulation in a broad spectrum of economic environments2.  This combination of popularity and novelty can increase the desire for close monitoring of performance in situations like the one we now observe.

With the majority of risk parity assets invested in hedge funds, the need for close observation poses a problem in terms of data frequency and timeliness.  A solution can be found by forecasting daily performance based on exposure estimates from the previous month, following the unique approach developed by MPI in collaboration with Prof. Russ Wermers.

For this, we performed a quantitative analysis of All Weather returns3 using MPI’s proprietary Dynamic Style Analysis (DSA) technique, similar to that performed on the Pure Alpha fund, the flagship fund of Bridgewater Associates, last year4.  Although the fund return data is monthly, the underlying factor data is daily which allows us to create the intra-month hypothetical track record of the fund even though the current month’s return is not yet available.

The chart above shows the cumulative performance of the All Weather Fund YTD as well as daily estimates using a synthetic portfolio consisting of daily frequency market factors5 for the intra-month periods.   Estimates up to May 31st are in-sample, while all subsequent estimates are out of sample.

The daily forecast implies a June return of approximately -6.4% and a YTD loss for the fund of approximately -8.6%.  Also indicated is a drawdown of approximately 14% between May 3rd and June 25th.

As always, please feel free to share this post, leave a comment, or reach out to us directly with any questions you may have.


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