CROSS ASSET: Risk Parity - Breaking Pivotal Support Around 480

Over the last 15 years there has been a mass migration to passive funds in the trillions of USD’s. With the allure of low fees, broad diversification and liquidity, Risk Parity became the new buzz word.

• The Cons though are beginning to mount. Capital floods into the same names, amplifying market weightings.
• No fundamental discrimination, it will buy whatever the index holds regardless of Macro risks or price discovery. As long as money comes in the fund it continues to pay the highs.
• What happens in a bear market ? Redemptions spike and just like when they buy on the way up at the highs, there is no fundamental discrimination on execution so as redemptions hit the fund it will also sell at the lows.
• This can amplify downside risks to the market especially in the names that are most heavily held. 
• Risk Parity was down another 1.73% overnight and is breaking a pivotal support area around 780 which could see an increase in redemptions and lock in a negative feedback loop. This bodes very poorly for stocks with a first target of around 680.

Risk parity index

Source: MNI - Market News/Bloomberg