The Wealthfront Risk Parity Fund (WFRPX) is underperforming similar risk parity funds like the AQR Risk Parity Fund (AQRIX). Since February, Wealthfront's fund is down 8.65%, according to Google data, while AQR's fund is down 2.55%.
In its white paper, Wealthfront uses AQRIX and Bridgewater's All-Weather Fund as comparisons. The digital adviser said backtests of its fund yielded better returns than both, net of fees.
Some Wealthfront clients have expressed their dissatisfaction with the fund on social media.
"Any chance you guys can explain why your risk parity is utterly busted and under performing the market?" asked Aria Haghighi, a Facebook engineer and Wealthfront client. "It sucks you opted us into your own fund, but can you at least have it work?"
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The company said it remains confident in its strategy.
"Judging a long term investment strategy in such a narrow span of time is a fool's errand and what often causes people to enact some of the worst investing behavior out there — buying high and selling low," said Wealthfront spokeswoman Kate Wauck. "We are confident in our Risk Parity strategy and believe it will improve our clients' risk-adjusted returns over the long term."
Ms. Wauck also said "it is incorrect to use AQR's mutual fund (or other risk parity strategies) as the benchmark for our risk parity strategy and vice versa as we target different levels of volatility."
This isn't the first criticism the fund has received.
Micah Hauptman, financial services counsel at Consumer Federation of America has previously criticized the company for defaulting users into the fund and for not being transparent with investors about the total underlying costs.
"Wealthfront continues to destroy its clients' money with its shoddy and conflict-ridden in-house fund," he tweeted on Thursday. "At what point will it pull the plug and decide that being a legitimate fiduciary adviser is more important than the fees it's extracting from clients?"
Joe Mallen, chief investment officer of Helios Quantitative Research, said risk parity strategies in general highlight some of the flaws in backtesting strategies. The funds often look at a long-term relationship between asset classes without understanding that they change over time.
"You can apply correlations all day long to achieve the risk exposure you're looking for, but at the end of the day they don't always move in that fashion," Mr. Mallen told InvestmentNews.
Other risk parity funds are easily outperforming equity and fixed-income gauges.
The S&P Risk Parity Index has lost a modest 1%over the past six days versus a 6.3% slump in the S&P 500. It's also besting a benchmark exchange-traded fund tracking long-dated Treasuries and a classic 60/40 portfolio.
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"Risk parity does not seem to be suffering anywhere as much volatility as it did in February, meaning that it won't need to deliver as much," said Pravit Chintawongvanich, equity derivatives strategist at Wells Fargo Securities.
So far in this week's stress-test, the volatility-based allocation has insulated these funds from pain — even as traditional two-decade correlations between stocks and bonds crater.
The S&P 500 Index fell more than 3%on Wednesday while the iShares 20+ Year Treasury Bond ETF also declined, an in-tandem slump registered only three times during bull-market cycles in the 16-year history of the product. The benchmark stock index was down as much as 2.7%on Thursday.
One reason for Wealthfront's under-performance is that the fund typically gets exposure to commodities through energy stocks rather than commodity futures. Wealthfront's fund also has a higher volatility target than some of its peers, another reason that may explain its under-performance.
Additional reporting provided by Bloomberg.