THE surge in market volatility this week, after a long period of tranquility, left investors seeking a culprit. Critics began pointing to an obscure investment strategy pioneered by the world’s largest hedge fund, Bridgewater Associates.
So-called risk-parity funds aim to reduce the danger from a collapse in any one market by limiting bets on more volatile assets like stocks and commodities and using leverage to load up on safer assets like government bonds. When volatility jumps, that leverage can in theory force the funds’ automated trading strategies to dump those assets, accelerating the selloff.