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How Wealthfront Waded Into Hedge Fund-Like Investing

May 15, 2018

Robo-advice pioneer Wealthfront has opted to deviate from its focus on passive investing by offering clients the ability to invest like hedge fund manager Ray Dalio of Bridgewater Associates, Bloomberg writes. But enough Wealthfront clients were so aghast at the higher fee charged for Wealthfront’s new risk-parity fund that the company had to slash its expense ratios in half, according to the news service.

In February, the company began including its Risk Parity Fund automatically in accounts with at least $100,000 in taxable assets, putting the onus on clients to opt out, Bloomberg writes. The fund was designed to follow Dalio’s approach, also followed by a few mutual funds: Risk-parity funds try to account for the low profit potential of a bonds-heavy portfolio while also accounting for the high volatility of an equities-heavy portfolio through investing in the bond market using derivatives that could make both potential profits and losses far higher as well as adding exposure to other asset classes, according to the news service.

Wealthfront’s version achieves exposure in bonds with derivatives such as total return swaps and forward and futures contracts, according to the company’s website, and is designed to adjust to a set level of annual volatility, Bloomberg writes.

Wealthfront’s risk-parity offering originally came with an expense ratio of 0.5%. And even though only a portion of a client’s money would go to the fund, some clients balked, according to the news service. The company responded by lowering the expense ratio to 0.25% last month, but Wealthfront’s standard offering of portfolios composed of ETFs comes with an expense ratio of just 0.15%, Bloomberg writes. Another issue is that risk parity funds may only be suitable for sophisticated investors — retail investors who don’t understand more complex elements such as leverage should stay away from such strategies, Maneesh Shanbhag, who co-founded Greenline Partners after five years at Bridgewater, tells the news service.

While the strategy may not be bad per se, retail investors who don’t comprehend it are likely to sell at the bottom, he tells Bloomberg. On the other hand, Wealthfront isn’t doing anything differently from the rest of the money management industry: Even though investing has been getting simpler, advisors and fund companies want to “offer an edge” in an increasingly competitive environment, the news service writes.

“I look at it as this race occurring to add more strategies, more capabilities,” says Devin Ryan, an analyst at JMP Securities LLC, tells Bloomberg.

By Alex Padalka
  • To read the Bloomberg article cited in this story, click here.