The speed and magnitude of the market correction, especially in credit, suggest that it’s not just regular Joes reacting to the oil price plunge or even the virus – you need a lot of money moving to cause such moves. In February, as volatility first spiked in the markets, risk parity funds have been systematically deleveraging and shifting risk allocation away from risky asset classes towards fixed income. Going into March, the typical risk parity strategy should have greatly reduced equity allocation while allocation to fixed income would have been near all-time high.
Culprit #1: Bridgewater
At $160 billion, whatever Bridgewater does is going to move the market. And once they start selling according to what the risk parity model tells them to do, markets will fall. On March 18, a Chinese forum zhihu which posted about Bridgewater imploding received 1 million views within 3 hours!
On March 25, another Chinese article by CSC Financial, a Chinese investment bank and brokerage firm established by CITIC Securities, talks about Bridgewater repeating the failure of LTCM:
Source: https://fund.jrj.com.cn/2020/03/25112529104174.shtml
Culprit #2: CIC
Also, on March 25, Bloomberg reported that “China’s $941 billion sovereign fund slashed its risk-parity portfolio by about 50%... China Investment Corp started cutting positions across its multi-asset Risk Portfolio around March 10, and completed the move within a few days”.
It went on to say that this internally managed portfolio, set up in 2011, is modelled after Bridgewater Associates LP’s All Weather risk parity fund!
So yes, it was risk parity that caused the market meltdown, but turns out there was not just Big Bad Bridgewater, there was also CIC!
Strangely, I could not find any Chinese forums talking about this. Only a translated version of the Bloomberg article:
Source: https://6do.news/article/2417603-01
Looks like there was more than one cook who spoiled the broth.