Risk-Parity Hedge Falls Short of Bank-Crisis Thesis
A second frontier model re-reads the same evidence. Thesis stance is what gets signed; the independent row is for audit and risk review — track accuracy over time on Model scorecard.
Research simulation only · Not investment advice · Not a trade recommendation · Past backtests do not predict future results.
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Evidence is mixed or benchmark-relative performance is inconclusive — no clear edge. Independent model review is shown separately — it does not change what is signed unless the evidence gate applies.
Risk-Parity Hedge Falls Short of Bank-Crisis Thesis
Indian bank equities are expected to underperform INR-hedged defensive and USD-linked assets over the next 12 months as rupee depreciation tightens funding conditions and weakens risk appetite.
The tested full-universe risk-parity strategy produced a positive but modest 7.09% annualised return from 2019-05-27 to 2026-05-25, with a 0.46 Sharpe. Its -9.06% maximum drawdown and 6.76% annualised volatility indicate useful risk control, but not a compelling crisis hedge. The structure remains long Indian banks through BANKBEES, HDFCBANK and ICICIBANK, so it does not directly express the underperformance thesis. Given mid-range risk-adjusted returns and clear regime fragility, the appropriate stance is hold.
- The backtest generated a 60.09% total return and 7.09% annualised return over 2019-05-27 to 2026-05-25, so the strategy is not structurally broken.
- Risk-adjusted performance was modest, with a 0.46 Sharpe and 0.50 Sortino, placing it in the unconvincing but viable range.
- Realised risk was contained, with 6.76% annualised volatility, -9.06% maximum drawdown, and -0.64% 95% CVaR.
- The 56.2% daily win rate suggests some consistency, but not enough to offset the middling Sharpe profile.
- The allocation method naturally cuts exposure as realised volatility rises, but monthly rebalancing and a 63-day volatility signal may react after bank-equity losses have already occurred.
- The universe includes MON100, GOLDBEES and LIQUIDBEES as defensive or USD-linked offsets, but also retains overlapping exposure to the Indian bank credit cycle.
- The strategy is long BANKBEES, HDFCBANK and ICICIBANK, so a bank-led crisis would likely hurt performance before volatility-based sizing can reduce exposure.
- Inverse-volatility sizing ignores correlation, allowing HDFC Bank, ICICI Bank and BANKBEES to appear diversified until a common macro shock reprices them together.
- Monthly rebalancing and a 3% minimum weight per asset create stale-risk and forced-long exposure during gap-down events.
- MON100 may not hedge a global risk-off regime, as USD/Nasdaq exposure can be pressured alongside Indian banks during FII outflows or rate-hike shocks.
Allocates inversely to volatility, naturally cutting stressed bank exposure if realized risk rises.
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