Way back in, uh, April, documentary film legend and hedge fund manager Paul Tudor Jones took time away from losing his clients money to offer a grim premonition: When the crash came—and, oh yes, it would come, and vindicate macro traders like himself—it would come upon the back of a pale horse named “risk parity.” And so it has (maybe) come to pass:
Data by Morgan Stanley show that risk-parity funds are close to record levels of leverage and hold large portions of their portfolio in equities, making them prone to rush for the door when stocks get more volatile.
To be sure, risk-parity funds may be too slow-moving to have played a big role in the selloff just yet, because they measure volatility using longer stretches of time. Yet bank traders warn they could put selling pressure on stocks over the coming months.
Paul Tudor Jones said inflation is about to appear “with a vengeance” and may force the new Federal Reserve chair to accelerate interest-rate hikes….
“We are replaying an age-old storyline of financial bubbles that has been played many times before,” Jones, founder of Tudor Investment Corp., wrote in a Feb. 2 letter to clients. “This market’s current temperament feels so much like either Japan in 1989 or the U.S. in 1999. And the events that have transpired so far this January make me feel more convinced than ever of this repeating history….”
“It is incredible that at full employment we have passed a tax cut that will push our deficit to 5 percent of GDP,” Jones said. “Can you imagine what will happen to the deficit and debt in the inevitable downturn? This is what the dollar is sensing….”
He said 2018 brings “a new fact set and a field of dreams for macro” and cited the Bible: “To everything there is a season and a time to every purpose.” Jones said the passage was written for his trading style as the days of betting on rising markets may be numbered.