The Wealthfront Risk Parity Fund, launched in early 2018, has come under fire from numerous critics, with some citing it as a “volatile product that has underperformed benchmarks and contains difficult-to-understand costs, and a launch that automatically opted users into the fund, rather than allowing them to join of their own volition.”
Having built its reputation investing their client’s money in mutual funds and ETFs, The Wealthfront Risk Parity Fund represents a significant departure from their traditional model that styles itself after famous hedge fund manager, Ray Dalio’s Bridgewater All Weather 12% fund. This begs the question, how justified are these criticisms? Certainly, the opacity of the fund makes it difficult to investigate the exact nature of the costs involved, but how poorly has this fund performed when compared to its peers exactly?
(All below analysis based on data from Edgefolio and Bloomberg sources)
Performance
Firstly, we placed The Wealthfront Risk Parity Fund side by side with AQRIX:US, a Multi-Asset Fund that seeks to achieve risk parity by avoiding excessive risk exposure to any single asset class or risk premium. With volatility of 13.42% and 11.29% respectively, we crunched the numbers, and this was their relative performance:
Truncating the data set to the start of 2018 when WFRPX was launched, we see that Wealthfront actually outperformed AQR in relative terms, even though both funds are currently below their initial NAV at the start of 2018.
What about Bridgewater then, the fund that it intended to emulate from the very beginning? Similarly, we placed Bridgewater All Water side by side with Wealthfront to determine their relative performance.
At this point, we instead see Bridgewater All Weather outperforming its supposed “clone” by delivering a cumulative return of 2.28% as compared to WFRPX’s -3.61% within the same period. In fact, when normalising returns to match WFRPX’s volatility of 13.42% and Bridgewater’s volatility of 6.97% respectively, we see a greater divergence in their relative performance.
At the same time, when placed in comparison with the S&P500, the relative performance of WFRPX certainly leaves a lot to be desired.
Conclusion
Focusing purely on its performance, The Wealthfront Risk Parity Fund could perhaps be summed up as at least being in line with market performance. At the same time, the current time period of just 16 months may also be insufficient to provide a conclusive evaluation of Wealthfront’s performance. The controversy surrounding its performance is probably less justified considering that its relative performance is very much in line, if not better than some of its peers.
Wealthfront’s main selling point has been its ease of use and relatively low annual fees of 0.25% or less. After initially charging management fees of 0.5% to their customers, Wealthfront has since backtracked and lowered fees for the risk parity product back to 0.25% again.
At the end of the day, for customers lacking the sufficient capital to access hedge funds such as Bridgewater with much higher minimums, The Wealthfront Risk Parity Fund still represents a viable alternative to turn to. Even with the same risk parity concept, funds may still perform differently suggesting that there are many ways of skinning a cat.
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