A History of Risk Parity Through Wikipedia

From aiCIO Magazine's October Issue: Kip McDaniel traces the development of risk parity through its Wikipedia entry. 

To see this article in digital magazine format, click here

At 5:58 in the evening on May 28, 2009, someone with the username Cambridge10 logged onto the online crowdsourced encyclopedia Wikipedia and, for the first time, created an entry for risk parity. Over the next hour and fourteen minutes, Cambridge10 made four separate edits to the incipient page, including the first external link—a paper written by Edward Qian, who is credited with inventing the term and who has worked at Boston-based firms Putnam and Panagora. At 7:12, Cambridge10 signed off Wikipedia. He or she never created or edited another page again. 

The risk parity entry then languished. Like so many wedding homepages, it stayed on the Internet but was outdated and largely irrelevant. But then, over a year later, interest picked up again. Late in the evening of August 25, 2010, username AaCBrown—likely the financial author Aaron Brown, a prodigious Wikipedia editor in the financial space—executed a complete re-write of the page, adding a history of the theory as well as the first criticism of risk parity in practice. He added upwards of 20 external links, the breadth of which showed that AaCBrown knew his financial history and was in-tune with the growing strategy and the intellectual debate that surrounded it. 

If Cambridge10 was the risk parity entry’s Aristotle, and AaCBrown its Isaac Newton, Keithbob is its Albert Einstein. Keithbob is a Veteran Editor IV in the Wikipedia universe—a badge earned with 20,000 edits—and on the evening of May 18, 2011, he turned his prodigious talents to the risk parity page. “Lead should be a summary of the article not a detailed description,” he wrote in the editor’s section of the entry. He then started a whirlwind of small and large changes. Over the next year, and continuing to this day, Keithbob, with few changes from any other editor, has controlled the risk parity page’s edits. 

All told, there are three contributors to the risk parity Wikipedia page who have made edits of any consequence. One used a Boston-referencing username and contributed exclusively to this page, linking to a paper by a Boston-based risk parity pioneer. Another focused his or her many edits on finance and transcendental meditation, interests that mirror those of at least one founder of a risk parity firm. 

Of course, no one, including aiCIO, is suggesting that Ray Dalio or Edward Qian or Cliff Asness are editing Wikipedia pages. All three have much better things to do with their time. What can be suggested, however, is that while no pension funds are allocating assets based on Wikipedia pages, and while the anonymity of Wikipedia editors is at worst annoying, this minor intrigue lends credence to a major debate emerging around risk parity: Is this investment strategy a secular shift in the way capital pools should be managed—or is it a marketing gimmick? 

Going behind-the-scenes into the world of Wikipedia is an odd—even unsettling—experience. What the casual viewer sees when they arrive at the risk parity, or any, Wikipedia entry, is simply the glossy cover of a much larger book. Behind that cover, where few rarely venture, lives a subculture that is both unique and universal. Like any subculture, it has a language all its own. Each user has an avatar that can clarify or obfuscate their true identity. Some are so active as to appear to be employed by Wikipedia; others take a casual interest in one or two entries, and it stops there. Discussions between editors, like rival socialites at a party, can come across as so forcibly polite that all watching can perceive the petty tension below the surface. 

This is the world we entered. All good journalism, like good detective work, starts with one source and expands, web-like, outward. Risk parity vendors, regardless of whether this is a secular trend or gimmick, have an incentive to promote its use; risk parity opponents in the asset management space have the same motive, with the opposite result. Thus, instead of turning to Bridgewater’s Bob Prince or GMO’s Ben Inker (sparring partners in the risk parity debate), we turned to one source: Keithbob himself. 

 

 

At 12:37 on the afternoon of September 22, TheOctoberIssue—aiCIO’s Wikipedia avatar for this purpose—posted the following on Keithbob’s discussion page: 

 

 Keithbob, 

We’re a magazine (aiCIO) doing a piece on risk parity, and we noticed that you are the editor who is taking great care of that page. Our ‘hook’ for the article is a history of risk parity through its Wikipedia page—so I wanted to start a dialogue. What sparked your interest in this page? Caused you to really grab the horns on this one? I also see you edit a lot on meditation and such—any connection there? Sorry if I’ve asked you in the wrong format—i.e. this talk page—but I’m pretty clueless about this stuff. Is this the best forum to ask you questions in? 

All my best, and keep up the great work. 

TheOctoberIssue 

(For full-disclosure, I’m Kip McDaniel, editor of aiCIO. We cover risk parity quite extensively in the context of its use by asset owners i.e. pension funds, endowments etc. (our target audience) 

And then we waited. Keithbob usually responded to queries within minutes—with 20,000 edits, he spends a substantial amount of time on the website. But not this time. A full two days later, at 4:57 PM on September 24, he finally responded: 

Thanks for the compliments on my work at Wikipedia. I think most editors on Wikipedia have an evolving list of hobbies and interests that change as they continue to live and grow as a person. We sometimes are drawn to articles and topics on Wikipedia in that way. However, we are also drawn to specific areas where help, assistance or clean up is needed and we put our efforts there as well. In all cases though, I think the main motivation is to help with the global project to create and maintain a high quality, encyclopedia as a free Internet resource. That’s the main thing. In this way I consider myself to be a very minor part of giant team and don’t feel my contributions are unique or special in any way. With that in mind, I would like to respectfully decline your invitation but also wish you success with your magazine and its endeavors. 

 Best, Keithbob 

 In journalism, we call that a non-answer—but, with that, the trail went cold.

 

With the Wikipedia road coming to a dead end, we turned toward another source—the respondent comments littered among the harder data in our Risk Parity Investment Survey

Leo Tolstoy’s Anna Karenina started with this now-famous line: “Happy families are all alike; every unhappy family is unhappy in its own way.” Risk parity opinions, it seems, follow this rule. Praise for the strategy—heaped generously throughout the survey responses—all run along the same lines: it’s “integral to our current asset allocation” because of “the reduction in exposure to riskier asset classes”; “it’s a strategic asset allocation framework that we use”; and “it’s our portfolio’s underlying philosophy to asset allocation.” But by far, the more juicy—and varied—comments came from those who didn’t agree with the idea of risk parity. 

“[Risk parity] is a flawed methodology which is apparently used by other schemes,” wrote one respondent when asked to define it. 

“As a concept that has grown out of 30 years of declining interest rates, and now risks failing BIG,” wrote another. 

“It is an inferior methodology based on pseudoscience,” added another. 

Some commentators had more specific concerns. “[It’s] a naive perspective on [the] definition of risk,” one wrote. Put more harshly: “Who is stupid enough to leverage an asset class that is valued at a yield of 2.3% over a 30-year investment horizon?” And succinctly: “It’s an accident waiting to happen.” 

Perhaps the most insightful comment—while not addressing the criticism of whether risk parity is a marketing ploy above all else—came from a foundation investor when asked which strategy would perform the best going forward. “A blending of both the risk parity and endowment model approaches has the highest probability of performing the best,” the investor wrote. “It does not have to be an ‘either or’ proposition. The problem is that it takes a lot of skill to do this—and very few people have it. Even for the few people that have both the skill and the experience to do this, they will have to work in a governance structure like a Kodak or Salient (San Diego County) that is open-minded enough to allow this.” 

Tolstoy was right, wasn’t he? Too bad he didn’t lend his prodigious talents to the risk parity Wikipedia page. 

Which brings us to the quantitative results. First, a warning: the secular shift versus gimmick debate won’t be solved here. If anything, it will become more confused. Comparing year-over-year results of the aiCIO Risk Parity Investment Survey—the only one of its kind polling current, potential, and non-users of risk parity products—shows that the battle lines are hardening over whether risk parity belongs in an institutional portfolio. While a slightly larger percentage of polled asset owners (26.2% vs. 25.3%) said they have already allocated to risk parity products compared with a year ago, a slightly smaller percentage (20.5% vs. 25.3%) are only considering its usage. Overall, the number not using or considering the strategy rose from 49.4% to 53.3%. Separately 31% suggested that risk parity would outperform either an endowment-style or 60/40 portfolio over the next 10 years, risk-adjusted—down slightly from 38% in 2011, largely at the expense of the endowment model. Overall, our poll suggests a similar landscape to the contemporary presidential election: attitudes stubbornly split down the middle, with battle lines hardening. 

Perhaps the only thing certain from these results is the remaining uncertainty over whether we are seeing a secular shift in the way assets are managed. If nearly 50% of asset owners are using or considering using a certain strategy, it could hardly be called a gimmick—unless you hold the view that 50% of all large institutional investors have been deceived by clever marketing and overtures from the likes of the world’s largest asset management firms. 

And so the debate remains unresolved. Our journey down the rabbit hole into the Wikipedia backend revealed little beyond a curious subculture. Comments and data from our own survey showed a stark divide, not a consensus. Of course, few debates can ever truly be resolved—in America, after all, we’re still debating whether evolution is a historical fact or anti-religious pseudo-science—and the current disagreement over risk parity seems destined to fall into this dissatisfying category, at least for the foreseeable future. 

Interestingly, the only concrete conclusion we were able to draw from this investigation has little or nothing to do with the history of risk parity. As our research drew to a close we became interested in who, besides a summer intern we once put to the task, had taken the time to edit our Wikipedia entry. Among an assortment of seemingly professional editors and tangentially interested finance writers, one contributor stuck out. 

On September 14, 2011, Keithbob edited the aiCIO Wikipedia page—a year before we ever looked into this or contacted him.

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