AQR Strips ‘Risk Parity’ Name From Mutual Fund After Redemptions

(Bloomberg) -- AQR Capital Management’s flagship risk parity mutual fund, which has suffered big outflows, will no longer be billed as a risk parity fund.

The firm, which helped popularize the investing style, is changing the name and tweaking the strategy for its $344 million AQR Risk Parity Fund, according to a November regulatory filing. The rebranded AQR Multi-Asset Fund will have more leeway to bet against stocks and bonds, among other changes, which may help it navigate volatile markets.

Risk parity, which was pioneered by Ray Dalio’s Bridgewater Associates in the 1990s, promises smoother returns by balancing risk among stocks, bonds and other asset classes. While the strategy is meant to withstand turbulent times such as these, AQR’s fund has slumped 6.1 percent this year through early December, hurt by increased correlation among stocks and bonds.

“Stocks are down, bonds are down, and most commodities are down,” said Michael Rosen, chief investment officer of Angeles Investment Advisors. “It has been a year in which the strategy just has not worked well.”

Hit By Redemptions

AQR, which was co-founded by Cliff Asness and oversees some $226 billion, is changing the fund for greater flexibility in managing its assets, according to a person close to the firm. The modifications don’t reflect a shift in AQR’s views on the merits of risk parity, the person said. AQR has almost $30 billion invested in risk parity firm-wide.

Risk parity was conceived as an alternative to the traditional formula of allocating 60 percent of assets to stocks and 40 percent to bonds. Managers of risk parity funds aim to balance the volatility of each asset class by overweighting less risky securities, such as bonds, and also employ leverage to boost returns.

The strategy gained more traction after the financial crisis. Invesco Ltd. began offering a risk parity strategy in a mutual fund in June 2009, and AQR followed suit with its mutual fund the next year.

It proved to be bad timing. The nine-year bull market for U.S. stocks that was just getting underway was a boon for traditional 60/40 portfolios. The Invesco and AQR strategies couldn’t keep pace over the long run, and both were hit hard by redemptions. Investors have pulled about $750 million from the AQR fund over the past five years, including about $100 million in 2018, according to Bloomberg data.

“The 60/40 funds have just done so well,” said Jason Kephart, a senior analyst at Morningstar Inc. “It’s made risk parity look a lot worse than it really has been.”

This year has been particularly difficult for the strategy, which relies on gains in one asset type to offset losses in another. AQR’s risk parity fund has dropped more than a traditional 60/40 allocation, which is down about 1.3 percent. The firm declined to comment.

“As volatility has risen, many of these funds have had to de-risk systematically,” said Vineer Bhansali, CIO of LongTail Alpha, who has written on risk parity asset allocation. “And as correlations between stocks and bonds have flipped from negative to positive, they have had to de-lever more.”

The pain at AQR, which is based in Greenwich, Connecticut, has been widespread. Of 40 AQR mutual funds, only five had positive returns this year through Dec. 5, according to data compiled by Bloomberg. The firm’s $7.7 billion AQR Managed Futures Strategy Fund is down 9 percent for the year.

Changed Strategy

While the original prospectus for the AQR Risk Parity Fund said it “follows a risk parity approach,” the document for the renamed fund says it will seek to allocate in a way that “avoids excessive risk exposure to any single asset class.” The new prospectus omits any mention of risk parity in the description of the fund’s principal investment strategies.

The fund also replaced its annualized volatility target of 10 percent with a broader range of 7 to 13 percent. That frees AQR from having to automatically rebalance its portfolio when volatility spikes for one of its asset classes, such as bonds. In another change, the fund will be able to bet against individual securities that it expects to decline; the prior strategy generally only used short-selling to hedge, according to the SEC filing.

“We are probably going into a much more uncertain environment,” said Hakan Kaya, a senior portfolio manager in the risk parity and commodities fund unit at Neuberger Berman Group. “That is why we are still believers in risk parity.”

AQR’s rebranding and altered strategy take effect on Jan. 30.

©2018 Bloomberg L.P.