http://www.bloomberg.com/news/articles/2015-09-04/maybe-computers-weren-t-to-blame-for-august-s-stock-selloff-after-all
To JPMorgan's flows-and-liquidity team, however, matters aren't quite as clear-cut. On Friday, analysts led by Nikolaos Panigirtzoglou said that discretionary money managers, or (relatively) old-fashioned mutual fund and hedge fund managers, appear to have sold stocks to a far greater degree in recent weeks than quantitative-driven players such as risk parity managers.
.. This dismal performance by risk parity funds during August does not necessarily make them the main culprits of the recent market correction. First, the equity beta change during the August correction shown in Figure 3 is rather small (it moved from 0.3 to 0.2) compared to its historical variation. Second, risk parity funds do not typically apply high leverage to their equity investments. They instead apply high leverage to their bond investments in order to diversify their equity holdings, since bonds have roughly a third of the volatility of equities.
To JPMorgan's flows-and-liquidity team, however, matters aren't quite as clear-cut. On Friday, analysts led by Nikolaos Panigirtzoglou said that discretionary money managers, or (relatively) old-fashioned mutual fund and hedge fund managers, appear to have sold stocks to a far greater degree in recent weeks than quantitative-driven players such as risk parity managers.
.. This dismal performance by risk parity funds during August does not necessarily make them the main culprits of the recent market correction. First, the equity beta change during the August correction shown in Figure 3 is rather small (it moved from 0.3 to 0.2) compared to its historical variation. Second, risk parity funds do not typically apply high leverage to their equity investments. They instead apply high leverage to their bond investments in order to diversify their equity holdings, since bonds have roughly a third of the volatility of equities.
This framework makes risk parity funds more vulnerable to rises in bond volatility and in correlation between bonds and equities, rather than rises in equity volatility. And this probably explains the rather muted rebalancing in risk parity fund positions implied by Figure 3. During August, neither bond volatility nor the correlation between bonds and equities saw any material increase to induce risk parity funds to change their exposures in a more pronounced way.
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