I was interested to see he supports risk parity mostly on the basis of superior risk-adjusted return from low-risk assets, such as bonds. Low correlation is not stressed.
We see this in (my own observation), the Sharpe ratios, (May 1992 - Oct 2020), for Total Stock and Total Bond having been 0.54 and 0.84, respectively. He mostly talks about this, rather than low correlation. Thus, for example, his illustration:
This is coupled with fairly strong warnings on the risks of leverage, so that he suggests risk party "for investors (especially those with high net worth) with the capacity and temperament to accept the additional risks of leverage."
In his own words, a part of his presentation is (my boldfacing):
He also has some interesting observations on Ray Dalio:There are two methods by which an investor can hope to increase the return and risk of a portfolio. One technique is to overweight the portfolio with higher risk assets such as common stock. A second plan is to invest in a broadly diversified portfolio with a substantial weighting of relatively safer assets promising modest returns and relatively low expected volatility. This relatively safe portfolio can then be leveraged up to increase both its risk and return. The essence of risk parity is that the second strategy can in some circumstances offer the investor a better expected return per unit of risk. To be sure, leveraging can create its own unique set of extra risks since a leveraged investor is less able to ride out a temporary storm that often engulfs financial markets. But for investors (especially those with high net worth) with the capacity and temperament to accept the additional risks of leverage, the bargain offered by risk-parity portfolios may be sufficiently attractive to deserve a place in the overall portfolio. There is considerable evidence that individuals appear to overpay for wagers that offer a slim likelihood of winning but a large potential payoff if they are successful....
In the world of asset classes there are also favorites and long shots. And there also appears to be a tendency for investors to overpay for the long shots. A striking similarity between payoffs in the stock market and at the race track is that there is a tendency for people to overpay for investments with high risks but a possibility for unusually high returns. Very safe stocks (and other safe assets) appear to offer higher returns than their risk would warrant.
Ray Dalio is a unique individual. He is at once a billionaire who is one of the richest people in the world and a number one best-selling author. He runs the largest hedge funds in the world at Bridgewater Associates, where he developed the enormously successful risk parity fund, called the All Weather Fund. In his book, entitled Principles, he describes the more than 200 principles that guided his firm.
Whether Principles is a template to show people how to succeed in the investment business is unclear. Certainly one can't argue with the idea that investment strategies must be "evidence based" and tested against vigorous debate and criticism of others. But the work environment that Dalio created at Bridgewater has been described as toxic.
Dalio insists that employees be constantly evaluated with "radical honesty" rather than with kindness in an attempt to bring their performance up to a higher level. Each day observations (so- called dots) are collected regarding the effectiveness of the organization and its individual people. All meetings are taped. Employees are subject to public criticism, and each one has a baseball card detailing his or her weaknesses that is available online for everyone in the organization to see. The public criticisms of employees who don't measure up are called "public hangings." Employees are told to look to the example of a pack of hyenas murdering a young wildebeest as a blueprint for how to deal with each other in the workplace. Small wonder that a third of Bridgewater employees leave the firm within a few years. One employee complained to the Connecticut Commission on Human Rights that Bridgewater was a "cauldron of fear and intimidation." But there is no denying that the organization has produced uncommon investment results. And some people have appreciated this hardline culture.