One of Wall Street's most popular self-defense strategies failed during the coronavirus meltdown. Ex-Bridgewater advisor Damien Bisserier was among the few who made it work, and he told us how he did it.
- The popular defensive investing approach called risk parity fared badly in the 2020 sell-off.
- ARIS Consulting’s RPAR ETF was an exception, and co-founder Damien Bisserier told us why it worked.
- Bisserier’s strategy was informed by his long stint at Ray Dalio’s Bridgewater Associates.
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“You had one job!”
Risk parity strategies, which are designed to play the market conservatively and precisely target an amount of risk investors are comfortable with, didn’t a good job of limiting that risk during the severe sell-off a year ago.
It was a disappointing result for a tactic that had worked well in less-stressful moments and even achieved “nirvana,” in the words of Morgan Stanley US equity chief Michael Wilson, over the last 15 months of the 2010s bull market. But falling stock and bond prices dented its effectiveness.
Risk parity was championed by hedge fund billionaire Ray Dalio, so perhaps it’s fitting that one of the few investors who had real success with it in 2020 is a Dalio disciple. Damien Bisserier worked at Bridgewater for almost 10 years before he co-founded ARIS Consulting with Alex Shahidi in 2014.
In late 2019 the firm launched its RPAR Risk Parity ETF, which provided both stability and strong performance in 2020. In the first quarter of the year it fell only 4% when the S&P 500 dropped 20%, and for the full year, the ETF’s price rose 19.4%. That’s better than the S&P 500’s 16.3% gain.
Those results have helped the ETF attract more than $1 billion in assets in a little more than a year.
“Our strategy did fine because we didn’t cut risk,” Bisserier told Insider in an exclusive interview. “Most risk parity strategies tend to target a risk level and they react to short-term changes in volatility … which led most strategies to cut their risk at the worst possible time.”
In his telling, that means other funds did exactly what most investment advisers tell their clients not to do during big downturns: they locked in their losses by dumping stocks during a big sell-off. Then they invested conservatively in bonds and missed much of the stock market rebound that followed.
A long-term view of the market
Bisserier says the ARIS’s RPAR ETF is designed with a 30- to 40-year time frame in mind.
“We think the most critical decision that investors have to make when designing a risk parity strategy is you have to pick the right assets,” he said. “We want to find assets that have different sensitivities to different growth and inflation outcomes, because we believe those are the most critical economic drivers of relative asset class performance.”
His fund holds a blend of stocks, Treasury bonds, Treasury Inflation-Protected Securities, and gold. Bisserier says that the stock portion, about 30% of the fund’s assets according to Morningstar, includes some commodity producers to gain exposure to underlying commodities like oil.
Bisserier says he made only one change to the fund’s holdings in 2020, selling 15% of its TIPS holdings in March and replacing them with a roughly equal mix of gold and Treasury bonds. The TIPS holdings are a downside hedge, but he says he was concerned about the risk of deflation, which would have made them less effective.
That would seem to validate ARIS’ longer-term approach to risk parity, and Bisserier says it’s based on ideas he and Shahidi learned at Bridgewater. He explains that history shows any asset can struggle for a decade or even longer. That will tank returns for highly concentrated portfolios in a way they can’t recover from, so he wants to prevent that.
“This was how Ray Dalio invested his family trust money,” he said. “When you have a diverse portfolio where a driver of a bad decade for one asset is a driver of a bull market and another asset and so you have both of those assets in your portfolio, your average actually is tolerable across virtually any decade.”
To Bisserier, that longer-term approach is more effective, but also reflects a humility he learned from his former boss.
“The thing that Ray drilled into me is, you don’t know what’s going to happen,” he said. “The best investors in the world have a slight edge, but that means they’re wrong a lot. … A big part of this business is survival. It’s recognizing you’re going to be wrong, and building a thoughtful process in order to protect the capital that you’ve been entrusted with.”
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