Risk Parity Fund at Wealthfront

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
Topic Author
sabhen
Posts: 192
Joined: Sat Feb 27, 2016 1:03 am

Risk Parity Fund at Wealthfront

Post by sabhen » Sun Feb 10, 2019 1:03 pm

Risk Parity is an intriguing idea as evidenced by the monster thread started by HEDGEFUNDIE.
Wealthfront (with B. Malkiel as CFO) has started a Risk Parity Fund last year (WFRPX). Their advisory fees seem reasonable for a leveraged fund (0.25%).

For those who invested in this risk parity fund, can you please share your experience on this forum. Pros and Cons. What instruments do they use, how did it hold up in the 4th quarter of 2018, etc...

User avatar
willthrill81
Posts: 13594
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Risk Parity Fund at Wealthfront

Post by willthrill81 » Sun Feb 10, 2019 5:06 pm

sabhen wrote:
Sun Feb 10, 2019 1:03 pm
how did it hold up in the 4th quarter of 2018
According to Yahoo Finance, it's 1 year return is -7.88%.

Vanguard's Wellesley Income fund, what some have referred to as the 'poor man's risk parity fund', has a 1 year return of .09%.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

User avatar
nisiprius
Advisory Board
Posts: 39305
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Risk Parity Fund at Wealthfront

Post by nisiprius » Sun Feb 10, 2019 7:07 pm

I haven't followed Hedgefundie's thread too closely, and I hope he will speak for himself here, but I assume that the whole reason he's doing it himself is that he is not impressed with any existing risk parity mutual fund.

It isn't really sensible to draw any conclusions about a fund that's so new.

It has been a bad year for risk parity strategies, so bad that existing risk parity funds are changing their names and dropping out, but it has been worse for Wealthfront's fund, WFRPX.

Source
Image

For the Wealthfront fund, WFRPX (blue on the chart), the performance since inception, 1/22/2018, is easy enough to find. $10,000 invested in it an inception would now be $9,117.25. In addition to losing money, it has also underperformed the Morningstar category average (orange) and the benchmark, chosen by Morningstar (green); not clear to me if they are appropriate comparisons, but they're what Morningstar chose.

Since 1/22/2018, the AQR Risk Parity Fund (purple) has also lost money--but nevertheless outperformed the Wealthfront fund. However, it is no longer the "AQR Risk Parity Fund," it's now the "AQR Multi-Asset Fund." I don't know if it's changed its strategy.

The former Salient Risk Parity Fund, SRPAX, has changed its name and strategy to "Salient Adaptive Growth Fund," and the Morningstar chart just kind of cuts off in midflight (yellow on the chart) But at the point where it peters out, it was outperforming the Wealthfront fund.

Putnam PanAgora Risk Parity Fund, PPRPX, is not showing for me on Morningstar, I don't know why, but according to Putnam's website, it has only a minuscule asset value of $31.37 million. $10,000 invested in it at inception would have grown to $10,127. $10,000 invested in it on 01/22/2018 would now be $10,000 x $10,127/$10,343 = $9,791. So, since inception it's earned less than a bank account; since 1/22/2018, it's lost money, but it has outperformed WFRPX.

The term "Risk parity" was coined by Ray Dalio to describe the strategy he uses in his hedge fund, the "All-Weather Portfolio." There is an ETF-based strategy, popularized by Tony Robbins, that is named the "All-Seasons Portfolio," which was blessed by Ray Dalio. It's a long-only strategy so it's not clear how much it resembles "risk parity," but, in any case, from 1/2018, a $10,000 investment in it managed to grow to $10,019, and thus it, too, has outperformed the Wealthfront fund.

Portfolio 1, blue: Wealthfront Risk Parity, WFRPX
Portfolio 2, red: Tony Robbins/Ray Dalio "All Weather" ETF-based portfolio

Source
Image
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

HEDGEFUNDIE
Posts: 3560
Joined: Sun Oct 22, 2017 2:06 pm

Re: Risk Parity Fund at Wealthfront

Post by HEDGEFUNDIE » Sun Feb 10, 2019 7:34 pm

As mentioned on my "monster thread", I am not a fan of "conventional" risk parity approaches because they tend to devote a sizable amount of assets to fighting unexpectedly high inflation, a concern I find outdated. So you end up holding lots of commodities or TIPS which just don't do much for the portfolio over the long term.

viewtopic.php?f=10&t=272007&start=300#p4373011

I have no opinion about this particular implementation by Wealthfront.

Topic Author
sabhen
Posts: 192
Joined: Sat Feb 27, 2016 1:03 am

Re: Risk Parity Fund at Wealthfront

Post by sabhen » Sun Feb 10, 2019 9:05 pm

Agree that one year is too short to pass judgment on an investment strategy. My understanding is that risk parity strategies are designed to improve the risk-return ratio over a 100% equity or a standard 60/40 portfolio. It not designed for the "average" investor since min. investment is $5M, it seems. Thanks for your input.

User avatar
nisiprius
Advisory Board
Posts: 39305
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Risk Parity Fund at Wealthfront

Post by nisiprius » Mon Feb 11, 2019 7:38 am

sabhen wrote:
Sun Feb 10, 2019 9:05 pm
Agree that one year is too short to pass judgment on an investment strategy. My understanding is that risk parity strategies are designed to improve the risk-return ratio over a 100% equity or a standard 60/40 portfolio. It not designed for the "average" investor since min. investment is $5M, it seems. Thanks for your input.
I don't think this Wealthfront mutual fund is intended to be purchased at brokerages by ordinary people who are not Wealthfront clients. Wealthfront is a roboadvisor service, one of the pioneers in this young field. You answer questions and make choices and they automatically create and manage a portfolio for you. I find many things about Wealthfront to be dubious, one being the way they have changed the investment strategies several times in the less than ten years they've existed. Their previous phase had involved a fairly sensible, almost Boglehead-like portfolio of ETFs. Then they suddenly created this risk parity fund, and clients that didn't opt out automatically had 20% of their portfolio invested in the fund. I don't know if you can choose to have more. But, basically, the way you invest in this fund is to be a customer of Wealthfront.

You shouldn't sign onto any strategy based on a short summary description of what they are "designed to" do, incidentally.

If you are interested in risk parity, some things you really need to do are a) read at least something about Ray Dalio, such as his own essay, Our Thoughts about Risk Parity.

b) Decide whether you agree on those four specific categories of assets as the ones you want to be invested in long-term--and why.

c) Decide whether you believe that a "risk parity" strategy can be implemented properly without using leverage, and, if you conclude that it requires leverage, figure out how you are going to get it.

d) Decide whether the tamest and easiest "prepackaged" form of the strategy--the Tony Robbins "All Seasons" portfolio of ETFs--is right for you.

e) Decide what you think about "risk parity" strategies in general getting headlines about "stumbling" etc. circa 2015 and 2018, and what to think about supposedly "all-weather" strategies encountering these fairly sharp disappointments. It's pretty striking that two of the mutual funds that started out as risk parity funds decided to morph into something different.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

azanon
Posts: 2579
Joined: Mon Nov 07, 2011 10:34 am

Re: Risk Parity Fund at Wealthfront

Post by azanon » Mon Feb 11, 2019 8:55 am

willthrill81 wrote:
Sun Feb 10, 2019 5:06 pm
sabhen wrote:
Sun Feb 10, 2019 1:03 pm
how did it hold up in the 4th quarter of 2018
According to Yahoo Finance, it's 1 year return is -7.88%.

Vanguard's Wellesley Income fund, what some have referred to as the 'poor man's risk parity fund', has a 1 year return of .09%.
That's about what my portfolio lost last year (that I discuss in Improved Dalio/Robbins Portfolio thread), so it's interesting to see mine performed similarly. It was just a down year for the strategy. My SD was 6.x% though, so it was a "smooth" bad year. It's designed to be smooth, per Risk Parity, so at least that's working right.

columbia
Posts: 1948
Joined: Tue Aug 27, 2013 5:30 am

Re: Risk Parity Fund at Wealthfront

Post by columbia » Mon Feb 11, 2019 9:38 am

If I think of an “all weather” portfolio, minimizing losses is darn well near the top of the associated criteria. Let’s look at the Wellesley Income fund going back to 1985:

https://www.portfoliovisualizer.com/bac ... ion1_1=100


It experienced only 5 down years from 1985-2018, while providing a CAGR north of 9%.

Why should one believe that one of these overly complex and expensive strategies will provide greater returns and smaller losses than humble old Wellesley?

azanon
Posts: 2579
Joined: Mon Nov 07, 2011 10:34 am

Re: Risk Parity Fund at Wealthfront

Post by azanon » Mon Feb 11, 2019 9:46 am

columbia wrote:
Mon Feb 11, 2019 9:38 am
If I think of an “all weather” portfolio, minimizing losses is darn well near the top of the associated criteria. Let’s look at the Wellesley Income fund going back to 1985:

https://www.portfoliovisualizer.com/bac ... ion1_1=100


It experienced only 5 down years from 1985-2018, while providing a CAGR north of 9%.

Why should one believe that one of these overly complex and expensive strategies will provide greater returns and smaller losses than humble old Wellesley?
One thing you didn't mention: VG Wellesley beats a proxy LC Value US index, IT Investment-Grade Bond index by about 150 basis points (I studied this previously). In short, it's anything but ordinary or representative of any ole 2/3rds stock, 1/3rd bond strategy. Also In short, if we could all know the one fund that will do this again over that time period, I'm sure none of us would waste any time investing in it. The very essence of Risk Parity, in contrast, starts with an admission that it's not possible to know which investing climate will be most favorable so it risk balances all of the potential scenarios.

Anyone who doubts that, by all means, load up a LC Value, IT Investment grade proxy vs. it at portfolio visualizer. The indexes will lose horribly.

User avatar
willthrill81
Posts: 13594
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Risk Parity Fund at Wealthfront

Post by willthrill81 » Mon Feb 11, 2019 11:57 am

columbia wrote:
Mon Feb 11, 2019 9:38 am
If I think of an “all weather” portfolio, minimizing losses is darn well near the top of the associated criteria. Let’s look at the Wellesley Income fund going back to 1985:

https://www.portfoliovisualizer.com/bac ... ion1_1=100


It experienced only 5 down years from 1985-2018, while providing a CAGR north of 9%.

Why should one believe that one of these overly complex and expensive strategies will provide greater returns and smaller losses than humble old Wellesley?
It's been a great fund, to be sure, but over most of the period you reference (until about 2011), interest rates fell significantly, which significantly boosted returns of the fund's 65% bond allocation. We're very unlikely to see rates fall like that again any time soon.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

azanon
Posts: 2579
Joined: Mon Nov 07, 2011 10:34 am

Re: Risk Parity Fund at Wealthfront

Post by azanon » Mon Feb 11, 2019 12:16 pm

willthrill81 wrote:
Mon Feb 11, 2019 11:57 am
columbia wrote:
Mon Feb 11, 2019 9:38 am
If I think of an “all weather” portfolio, minimizing losses is darn well near the top of the associated criteria. Let’s look at the Wellesley Income fund going back to 1985:

https://www.portfoliovisualizer.com/bac ... ion1_1=100


It experienced only 5 down years from 1985-2018, while providing a CAGR north of 9%.

Why should one believe that one of these overly complex and expensive strategies will provide greater returns and smaller losses than humble old Wellesley?
It's been a great fund, to be sure, but over most of the period you reference (until about 2011), interest rates fell significantly, which significantly boosted returns of the fund's 65% bond allocation. We're very unlikely to see rates fall like that again any time soon.
I avoided pointing that out due to Risk Parity strategies generally relying on heavy doses of LT bonds. So to any extent it helped Wellesley, it should have helped Risky Parity just as much, if not more. Now that being said, Risk Parity generally looks great when backtested that far back, possibly for the same reason as Wellesley.

I sometimes think pointing out falling rates are so great for Bonds is a little overstated, since falling rates are generally good for stocks too. As a specific example, if the Fed announced they weren't going to go through with the upcoming planned rates hikes, I guarantee you the Stock Market would react positively, and more-so than bonds.

User avatar
willthrill81
Posts: 13594
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Risk Parity Fund at Wealthfront

Post by willthrill81 » Mon Feb 11, 2019 12:26 pm

azanon wrote:
Mon Feb 11, 2019 12:16 pm
I sometimes think pointing out falling rates are so great for Bonds is a little overstated, since falling rates are generally good for stocks too. As a specific example, if the Fed announced they weren't going to go through with the upcoming planned rates hikes, I guarantee you the Stock Market would react positively, and more-so than bonds.
I'm not sure that falling rates are as great for stocks as low rates. Low rates result in a low cost of capital, making expansion cheaper for companies. By comparison, interest rates dropping from 12% to 10% would still leave firms with a significantly higher cost of capital than if interest rates rose from 2% to 4%.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

azanon
Posts: 2579
Joined: Mon Nov 07, 2011 10:34 am

Re: Risk Parity Fund at Wealthfront

Post by azanon » Mon Feb 11, 2019 12:34 pm

willthrill81 wrote:
Mon Feb 11, 2019 12:26 pm
azanon wrote:
Mon Feb 11, 2019 12:16 pm
I sometimes think pointing out falling rates are so great for Bonds is a little overstated, since falling rates are generally good for stocks too. As a specific example, if the Fed announced they weren't going to go through with the upcoming planned rates hikes, I guarantee you the Stock Market would react positively, and more-so than bonds.
I'm not sure that falling rates are as great for stocks as low rates. Low rates result in a low cost of capital, making expansion cheaper for companies. By comparison, interest rates dropping from 12% to 10% would still leave firms with a significantly higher cost of capital than if interest rates rose from 2% to 4%.
I agree that low rates are also great for stocks.

Your comment earlier was about dropping rates, and I pointed out it's a bullish thing for stocks as well. Even from 12% to 10%, all other variables being equal, is a positive thing for stocks. You should be sure about it.

Rate changes and bonds get talked about so much that many people either forget or are unaware that it affects stocks too, and usually more-so from a percent change perspective. The other fact people forget is that if one plans on holding bonds longer than the duration of the bonds that they hold, then they should actually want rates to go up. The same cannot be said for stocks.

User avatar
willthrill81
Posts: 13594
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Risk Parity Fund at Wealthfront

Post by willthrill81 » Mon Feb 11, 2019 12:40 pm

azanon wrote:
Mon Feb 11, 2019 12:34 pm
willthrill81 wrote:
Mon Feb 11, 2019 12:26 pm
azanon wrote:
Mon Feb 11, 2019 12:16 pm
I sometimes think pointing out falling rates are so great for Bonds is a little overstated, since falling rates are generally good for stocks too. As a specific example, if the Fed announced they weren't going to go through with the upcoming planned rates hikes, I guarantee you the Stock Market would react positively, and more-so than bonds.
I'm not sure that falling rates are as great for stocks as low rates. Low rates result in a low cost of capital, making expansion cheaper for companies. By comparison, interest rates dropping from 12% to 10% would still leave firms with a significantly higher cost of capital than if interest rates rose from 2% to 4%.
I agree that low rates are also great for stocks.

Your comment earlier was about dropping rates, and I pointed out it's a bullish thing for stocks as well. Even from 12% to 10%, all other variables being equal, is a positive thing for stocks. You should be sure about it.

Rate changes and bonds get talked about so much that many people either forget or are unaware that it affects stocks too, and usually more-so from a percent change perspective. The other fact people forget is that if one plans on holding bonds longer than the duration of the bonds that they hold, then they should actually want rates to go up. The same cannot be said for stocks.
Indeed.

Just to be clear for a casual observer to this thread, an increase in interest rates reduces the value of existing bond principal but increases the expected bond yield going forward. So over the long-term, relatively high interest rates are good for bond holders. High interest rates are not good for stocks due to the resulting high cost of capital.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

MenloJim
Posts: 1
Joined: Mon Feb 11, 2019 9:05 pm

Re: Risk Parity Fund at Wealthfront

Post by MenloJim » Mon Feb 11, 2019 9:53 pm

Wealthfront reports that my Risk Parity holding is down only 2.4% as of today. :oops:

What explains the recent performance of Risk Parity? Here's what Wealthfront says as of January 26, 2019:

"Since the Fund’s launch in January 29, 2018, all but one of the asset classes represented in the Risk Parity portfolio (reported in the quarterly Form NQ filing) are down. Emerging markets stocks and bonds, which contribute a significant portion of the portfolio, have been particularly impacted due to various political and financial reasons, including the imposition of trade barriers. By comparison, losses in US bonds since the beginning year have been modest."

Wealthfront's "explanation" continues at:
https://support.wealthfront.com/hc/en-u ... sk-Parity-

More details, including holdings (almost all very short term U.S. Treasury Bills?), at:
http://edgar.secdatabase.com/962/158064 ... g-main.htm

User avatar
whodidntante
Posts: 6558
Joined: Thu Jan 21, 2016 11:11 pm
Location: outside the echo chamber

Re: Risk Parity Fund at Wealthfront

Post by whodidntante » Mon Feb 11, 2019 10:39 pm

Although the ER is low, it's not necessarily cheap. The fund manager seems to favor swaps. Swaps sometimes involve men in suits eating your lunch. It's a yellow flag, but I'm too lazy to vet those swaps and sound the fee tsunami horn.

Another yellow flag is Wealthfront.

Post Reply