By SIMON CONSTABLE
There's a problem lurking in the stock market known as the "risk-parity" trade.
There's a problem lurking in the stock market known as the "risk-parity" trade.
The strategy, which involves investors switching between different assets based on changes in market volatility, has now grown so big that it threatens to sink the market.
How big? Some estimates peg the amount of money pursuing this type of strategy at as high as half a trillion dollars. Trades designed to profit from changes in volatility, which are inextricably linked to risk-parity, add as much as a further $2 trillion.
The issue is not the strategy itself, it is when investors decide that it is no longer useful and decide to exit their positions. In other words, when all at once they dump their positions the market will likely tank.
Here's what you need to know.
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