Practical Applications of Are Risk Parity Managers at Risk Parity?

Abstract

The global economic crisis, which resulted in devastating losses to traditional, capital-based asset allocation portfolios, spiked interest in risk-based portfolios. As a result, risk parity strategies have taken off in recent years. Champions of the increasingly popular risk parity strategy maintain that traditional strategies such as 60/40 typically end up unbalanced, with a higher allocation to riskier assets or equities, unlike risk parity strategies, which allocate portfolio risk across asset classes. But are the increasing ranks of so-called risk parity portfolios truly at risk parity? Because risk parity is open to different interpretations, it is difficult for investors to tell the difference between risk allocation approaches, research shows. <i><b>Are Risk Parity Managers at Risk Parity?</b></i>, published in the Fall 2013 issue of <i><b>The Journal of Portfolio Management</b></i>, aims to define risk parity and examines whether a sample of risk parity managers are truly adhering to the risk parity principle. “Risk parity since 2008 on the one hand has become an accepted investment strategy,” <b>Edward Qian</b>, Chief Investment Officer in the Multi-Asset Group at <b>PanAgora Asset Management</b> in Boston says. “As someone who christened the term, I thought there could be misinterpretation.” <b>TOPICS:</b>Portfolio management/multi-asset allocation, factors, risk premia, risk management