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Bridgewater Defends Risk Parity Strategy That It Developed & Nurtured

As Bridgewater Associates flagship $80 billion “All Weather Fund” strategy found difficulty in August, falling by 4.2 percent, while the macro fund was reported down 6.9 percent on the month, the hedge fund is out with a document explaining their approach to risk parity and how long term exposure to risk, not short term market cycles, is a key consideration.

With the S&P 500 index down 6.3 percent in August, many investors struggled to various degrees. Hedge fund managers such as David Einhorn, down 5.3 percent in August, and Lee Cooperman, down from 9 to 11 percent in his various funds, all found significant difficulty. What has surprised some is the degree to which normally noncorrelated fund managers, such as Cantab Capital and Winton Capital, have taken a dive in August as well. While they didn’t engage in a risk parity strategy, volatility targeting was equally a subject of examination by a widely read JPMorgan Chase & Co. (NYSE:JPM) quantitative research report. It is in this environment that Bridgewater explained its strategy in detail in what appears to be a new white paper on its web site.

Bridgewater: "Risk parity is about balance" and managing growth and inflationary expectations

“Risk Parity is about balance,” Bridgewater Associate’s Co-Chief Investment Officer Bob Prince proclaimed in the title of a new public document that explains their strategy in detail. The concept behind risk parity is to diversify risk exposure among different market environments. The four market environments are rising and falling inflation and economic growth. When bonds are rising in value stocks may be falling, is the core logic. "The All Weather approach exploits these reliable relationships by holding similar risk exposure to assets that do well when (1) growth rises, (2) growth falls, (3) inflation rises, and (4) inflation falls (all relative to expectations), through four sub-portfolios which are designed to capture these four risk exposures,” the report...