Risk-parity strategies are emerging relatively unscathed from the Donald Trump era's initial spike in Treasury yields, a market move some had seen as a potential Achilles' heel for portfolios with leveraged bond exposures.
In the final quarter of 2016, the yield on benchmark 10-year Treasuries jumped to 2.445% from 1.597%, after the election of a celebrity real estate mogul promising a return of the U.S. economy's salad days.
A prolonged bear market for bonds — following a 30-year bull market — had been seen as a dangerous scenario for a strategy that leverages exposure to bonds to bring their contributions to total portfolio risk in line with that of equities.
But managers said the fallout proved less than devastating.
“Bonds got crushed” in the fourth quarter but equities and commodities did OK, said Michael Mendelson, a principal with AQR Capital Management LLC and a portfolio manager for the Greenwich, Conn.-based firm's risk-parity strategy. While AQR's risk-parity strategy ended the year off its intrayear highs, “all in all, it held up really well in a really terrible bond market,” he said. He declined to provide performance numbers.
Robert Job, head of business development and client solutions with Boston-based PanAgora Asset Management Inc., told a similar story. His firm's risk-parity strategy — which accounts for roughly a quarter of PanAgora's $40 billion in assets under management — gave back roughly 3 percentage points of gains in the fourth quarter but still ended the year up 13%.
Risk-parity allocations have “weathered the jump in yields amazingly well,” said Robin L. Diamonte, vice president and chief investment officer of United Technologies Corp.'s $24.8 billion pension fund. Seven percent of those assets are allocated to risk-parity managers, including AQR and Bridgewater Associates LP.
“Our worst-performing manager was down just a little more than 2% in the fourth quarter,” making risk parity the fund's third-highest returning asset class in 2016 — an “outstanding year” for the strategy, she said.
Still, Ms. Diamonte said her team is now “in the middle of a project” analyzing how expectations of higher growth, faster interest rate hikes and stronger inflationary pressures could affect the role risk-parity strategies play in UTC's broader portfolio.