Risk parity is the strategy that has aroused the most attention recently, and now boasts as much as $600bn of assets under management, excluding leverage that multiplies its influence. These funds seek to create a blended but dynamically adjusted portfolio of stocks, bonds and commodities balanced by the respective volatility of the asset classes, rather than traditional capital allocations.
The strategy was pioneered by Bridgewater, the largest hedge fund in the world, and its mostly superlative performance has helped it spread to pension funds and insurers across the world and spurred imitators at other asset managers.
However, risk parity funds first came unstuck in 2013, when bond markets were severely rattled by the Federal Reserve's plans to unwind its quantitative easing programme, and are now suffering another bad summer. A JPMorgan index of 17 RP funds lost more than 8 per cent between the beginning of May and the end of last month, compared with the S&P 500's 6.5 per cent drop over that time.
Some analysts and investors fear a self-reinforcing cycle of selling, as RP funds and other volatility-sensitive trading strategies respond to the recent bout of turmoil. Mr Kolanovic estimates that the selling pressure could reach $300bn over the next three weeks, and some big traditional investors are perturbed at the consequences.