Risk Parity – Gell-Mann paradox

The newsletter, Epsilon Theory, authored by Ben Hunt, chief risk officer of Houston-based asset manager, Salient Partners, examines the markets through the lenseshttps of game theory, history, and behavioural analysis. Salient also happen to own the index that tracks the risk parity. So they know a thing or too about it, and in this note Hunt seeks to address a lot of market misinformation about risk parity. For him, it’s a classic example of the ‘’Gell-Mann paradox. This relates to how an expert reacts to information they read where they know exactly what the facts are, and where – in their view – it is not just that the facts are wrong but it is also wrong in interpretation, impact, motivation … everything. Yet as soon as the said expert reads an article on something he or she knows nothing about, that person might go go, ‘hmm, that’s interesting.’ It’s as if they’ve been struck by amnesia. This occurred to Hunt last week when he read an array of pieces that suggested risk parity was at the heart of the sell off in risk assets. These stories were completely wrong, and he provides references to a piece from AQR, that he cites an example of something closer to the truth. Also check out WRGuinn on twitter, which is also quite useful. Last weeks Epsilon Theory captures what Hunt does think is responsible for what’s going on in February (and the months ahead), Click here to read the full note.