ReSolve Risk Parity - 2016 Year End Review

Video Content

Adam Butler – CEO

0:00 – Introduction
0:43 – Risk Parity in 2016
3:36 – Risk Parity vs. US Equity Markets in Context
6:45 – Relative Performance US vs International over 100 years
8:22 – High Valuation Numbers for North American Equities

Rodrigo Gordillo – Managing Parner

9:40 – Consolidation Periods put into Context
10:22 – 1994 analog consolidation year vs 1995-1996 strong growth periods
12:47 – 2004 analog consolidation year vs 2005-2006 strong growth periods
14:07 – Summary

Mike Philbrick – President
15:12- Conclusion

2016 was a good year for most global Risk Parity mandates.

However, the year should be seen as a tale of two periods: the first six months being one of the best returning periods for global Risk Parity strategies as they not only avoided the aggressive equity correction in January through February and the Brexit air pocket but managed to do so with positive returns, making them great diversifiers for most traditional portfolios. In the latter half of the year starting in July however, most major asset classes except a few, notably US Equities and Commodities, had sharp corrections and corrective trends leading to a difficult year end for Risk Parity mandates generally whilst still providing good returns over the full calendar year.

The Horizons Global Risk Parity ETF (HRA) launched on July 20th, 2016, just days after the Barclays Global Treasury Index yield troughed at 0.52%, its lowest level since inception in 2000 (Source: Bloomberg Barclays Indices). Coincident with the bottom in global rates, benchmark U.S. Treasury yields bottomed at 1.37%, the lowest rate in 145 years (Source: Robert Shiller, 2016). By December 30th, the final trading date of the year, benchmark yields had backed up to 2.45%, fully 78% higher than the lows hit just 5 months earlier.

This poor timing for the launch should be seen more indicative of an expected mean reversion coming out of an outlier first half of the year than anything else and could set us up for a rebound in the opposite direction coming into 2017 given how overstretched US equities (the recent winners ) seem to have become.