No, I am saying that the correlation between equities and bonds is not constant. You need a correlation forecast to weight the portfolio correctly. The problem was the herding behaviour that happened before.
I worked in the industry at the time, we dealt with one of the biggest RP providers in my country that eventually blew up because their vol/corr forecasting was bunk and they made huge hiring mistakes because, like you, the execs thought it wasn't a directional strategy...they lost 95% of their AUM and everyone got fired, 100% of the team, gone. The timeline was very clear: rates fall, people ask how does this work with zero rates, providers say corr is holding up, it starts going wrong but then EU brings in negative rates...big bail out for the boys..., people then ask how it works with -2% rates, providers say corr is holding up, no bail out, they begin loading up on duration, numbers stack up on paper, equities skyrocketing, more duration, if rates go up then big trouble...but the Fed is in control...then rates go up, and it is over. Risk limits breached 3-4x over. I remember seeing funds that had 5-7% annual vol targets dropping 25-30% in six months.
No, it isn't. The principle is that you lever up to create components that are equal in vol...that is the "parity" in risk parity, you lever/delever to create equal-risk assets (it is actually more simple than this: because equities have poor risk-adjusted returns due to leverage limits then risk-parity was effectively increasing bond allocations and reducing equity allocation, that was it). Diversification is an outcome if you have forecast vol and correlation correctly, if you have not then it is not some magic way to increase your returns.
Yes, but that is totally irrelevant to this discussion. It is just some guff that they use to sell funds to idiots.
Again, this is a directional strategy. The firms that make money have both vol and correlation forecasting models that work. It is not magic, it is just a way to portfolio weight...which requires good inputs.
I worked in the industry at the time, we dealt with one of the biggest RP providers in my country that eventually blew up because their vol/corr forecasting was bunk and they made huge hiring mistakes because, like you, the execs thought it wasn't a directional strategy...they lost 95% of their AUM and everyone got fired, 100% of the team, gone. The timeline was very clear: rates fall, people ask how does this work with zero rates, providers say corr is holding up, it starts going wrong but then EU brings in negative rates...big bail out for the boys..., people then ask how it works with -2% rates, providers say corr is holding up, no bail out, they begin loading up on duration, numbers stack up on paper, equities skyrocketing, more duration, if rates go up then big trouble...but the Fed is in control...then rates go up, and it is over. Risk limits breached 3-4x over. I remember seeing funds that had 5-7% annual vol targets dropping 25-30% in six months.
No, it isn't. The principle is that you lever up to create components that are equal in vol...that is the "parity" in risk parity, you lever/delever to create equal-risk assets (it is actually more simple than this: because equities have poor risk-adjusted returns due to leverage limits then risk-parity was effectively increasing bond allocations and reducing equity allocation, that was it). Diversification is an outcome if you have forecast vol and correlation correctly, if you have not then it is not some magic way to increase your returns.
Yes, but that is totally irrelevant to this discussion. It is just some guff that they use to sell funds to idiots.
Again, this is a directional strategy. The firms that make money have both vol and correlation forecasting models that work. It is not magic, it is just a way to portfolio weight...which requires good inputs.