32 BARRON’S March 16, 2020
agers decide how much to have in each
asset class, “based on a long-term view of
their risks” under different market sce-
narios, Bisserier says. In other words,
they assess how much each asset class’s
volatility is likely to influence that of the
overall portfolio.
Since stocks historically have been
more volatile than bonds, they receive a
smaller percentage of the ETF’s asset
allocation, even though they account for
28% of its risk allocation. Treasury bonds
account for 35% of the portfolio, as do
TIPS, but more-volatile stocks and com-
modities are each 25%—for a total of
120%. The figure exceeds 100% because
the fund employs leverage to amplify its
bond exposure, a typical feature for risk
parity funds. Because they try to equalize
the volatility levels among asset classes,
more bonds are necessary. The extra
bonds have bolstered the fund in the cur-
rent selloff; the ETF was in positive terri-
tory until oil prices fell hard this past
Monday.
A leveraged bet on Treasuries could
seem risky, since they move inversely
with interest rates. But that is part of the
design. “What would cause rates to rise?”
asks Alex Shahidi, another ARIS partner.
“If it’s a strong economy, then that’s prob-
ably going to be really good for equities
and commodities.” Each asset class is
meant to cancel out the others’ risks.
The ETF’s stock allocation is currently
28%, not 25%, because Shahidi and Bis-
serier achieve their commodity exposure
partially via commodity stocks. That
would normally increase the ETF’s corre-
lation to the stock market’s moves, except
that ARIS is buying commodity-producer
stocks that move more with commodity
prices. It’s this sort of nuance, the ETF’s
marquee management, and the fund’s low
(for a risk parity strategy) 0.5% expense
ratio that have attracted assets to it in
just three months of operation.
No doubt the resilience during the re-
cent slide has helped, too.B
FUNDS
ANewETFUsesaHedge
Fund Strategy—Well
N
ot many ETFs with stock expo-
sure have held up in the past
month’s coronavirus onslaught.
A new exchange-traded fund,
theRPAR Risk Parity(ticker: RPAR)
has, however—it’s down just 4.2%, de-
spite having a 28% stock weighting.
That’s while the S&P 500 index has
dropped 12%, and every asset allocation
ETF with similar equity exposure has had
significant losses.
But RPAR isn’t your ordinary alloca-
tion ETF. It employs a strategy called risk
parity that hedge funds and sophisticated
institutional investors use. Damien Bis-
serier, a partner at the fund’s manage-
ment firm, the $12 billion Advanced Re-
search Investment Solutions, or ARIS,
worked for nearly a decade as an invest-
ment associate at Bridgewater Associates,
one of the world’s largest hedge fund
managers.
“The first [risk parity strategy] I am
aware of is the Bridgewater All Weather
Strategy, which was launched in 1996,”
Bisserier says. “Initially, it was created for
[Bridgewater founder] Ray Dalio’s family
trust, and then ultimately became a port-
folio offered to clients. When I was at
Bridgewater, we used it not just as an in-
vestment product, but also as a template
to help clients think about asset alloca-
tion. All Weather represented Bridgewa-
ter’s best thinking around how clients
should hold assets over the long term as
an alternative to a more traditional [60%
stocks/40% bonds portfolio] approach.”
This is the first time that a risk-parity
strategy has been attempted in an ETF, and
the $241 million fund is just three months
old. It’s actively managed, however, en-
abling it to move nimbly amid today’s mar-
ket volatility and ever-changing risk.
The risk-parity fund works by allocat-
ing its assets to global stocks, Treasury
bonds, Treasury inflation-protected secu-
rities (TIPS), and commodities. The man-
By Lewis Braham
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