RISK Magazine

Risk.net’s Luke Clancy steps into the role of a due diligence analyst, drawing on insights from MPI’s research Solving the Biggest Puzzle of the 2024 Endowment Season to interview Phil Zecher, the star CIO behind the top-performing Michigan State University (MSU) endowment. He writes:

“The composition of the equity portfolio – which Zecher keeps closely guarded – is the subject of intense speculation. Quantitative analytics firm Markov Processes International (MPI) claims to have reverse-engineered the source of MSU’s returns from 14 annual published returns. It says the most striking factor is MSU’s significant exposure to technology stocks, the highest amongst peer endowments.”

Read the entire Risk.net story here (subscription required).

“Risk parity strategies – designed to withstand all economic circumstances – have been tested in recent times by the triple threat of unfavourable rates, spiked inflation and asset correlation breakdowns. Few managers in the field were above water through most of 2023; some saw increased portfolio risk exacerbated by leverage and untamed volatility, says a study by Markov Processes International.” – writes Luke Clancy in his Risk.net article “Can risk parity ride out the storm of correlated asset chaos?” The article extensively quotes MPI’s original research.

2022 has been a challenging year for some of the largest risk-parity funds. RISK.net’s Luke Clancy covers MPI research “Is 2022 All Bad Weather For Risk Parity?” in his article Keep risk parity simple, stupid – Risk.net (subscription required)

Risk.net is citing research from MPI, J.P. Morgan and Societe Generale in their analysis of January 24th, 2022 market reversal: “MPI, which runs a replication index tracking 20 large systematic traders, says those firms (most likely) cut their S&P 500 exposure from 6.5% on January 18 to 0% by January 24.”

“Estimates of daily changes in leverage at risk parity mutual funds, one group of volatility-targeting investors pinpointed as contributors to deleveraging last month, suggest some funds cut leverage sharply but others didn’t“, writes Faye Kilburn about MPI’s research in her Risk.net article. 

“Low beta funds have seen their Morningstar ratings drop significantly since the tail end of the 2008 financial crisis fell out of the 10-year lookback window used to rate performance. According to research by Markov Processes International, nearly 15% of US equity funds saw their 10-year Morningstar ratings change by at least two stars in the 12 months to the end of April – a 500% increase over the prior year.” Read the full article here. (subscription required)

“This year, it’s been like watching popcorn. One after another things popped,” Bridgewater co-CIO Bob Prince tells Risk.net’s Rob Mannix in this article, which cites MPI research. “The difference though is we’ve not had a contagion effect. Each event is an isolated event. Then it goes away…. That’s because, though the central banks are withdrawing liquidity, the financial system is in a very different situation from what’s typical at this stage of the cycle. Typically at this stage of the cycle the financial system is overleveraged because it’s been financing the economic expansion.” Read the full article here. (subscription required)

Supported by quantitative analysis and commentary from MPI Director of Research Apollon Fragkiskos, Risk.net takes a comprehensive look at risk parity funds’ behavior, finding that Q4 2016 returns suggest the strategy did not engage in a sell-off or act systematically to push market volatility up and asset prices down as some critics assumed.

In light of CalPERS’ termination of its hedge fund program, Risk.net editor Luke Clancy covers exclusive MPI research on the relationship between scale, selection and impact of allocations to hedge funds on the portfolio risk and return profile at pension funds. Testing a hypothetical CalPERS portfolio with allocations to hedge funds of 1%, 5% and 10%, MPI’s research finds significant positive benefits on total returns and risk-adjusted returns of hedge fund allocations at the 5% and 10% levels, though negligible impacts on the risk and return profile at the 1% level. The findings contribute to the industry debate about the role of hedge funds in defined benefit plans, including issues of scale and selection. The article appears in the November issue of Risk, as well as online in a related CalPERS story. For the full research, see MPI’s Research.

In a series of articles on the rise of multi-alternatives published in the May issues of Risk Magazine and Hedge Funds Review (“Hedge Funds for the Masses”), Kris Devasabai utilizes exclusive MPI’s quantitative analysis of a multi-alternatives fund (“Brilliance Bundled in Quantity”) and commentary from Michael Markov on the need for due diligence in the expanding universe of liquid alternatives offerings, a class facing regulatory review and challenges in educating investors on risk and structure.