Risk parity

Risk Parity instead of Return Forecasts

 

Risk Parity concepts have established themselves in recent years and are now being used both in institutional portfolios and mutual funds and are offered as investable solutions. The strategy is characterized by the fact that contrary to the classical monetary weighted asset allocation a distribution is implemented based on the risk contributions per asset class. This has the advantage that for example in a classical multi-asset balanced strategy “risky” asset classes do not dominate the performance respectively risk result and thus leads to a much more balanced portfolio structure.

Another important advantage is that the investment process of the risk parity strategy is not dependent on fragile market and return forecasts. The management of risk parity between asset classes can be implemented on the basis of risk prediction, so that the inherent weaknesses of market forecasts are ruled out in this strategy.

The risk parity approach as a building block can provide an important contribution in a broadly diversified institutional investment portfolio. Although the risk parity approach must accept cyclical downturns – like any other investment strategy too – the contribution of diversification in a portfolio context is quite attractive. However, it is essential to detect the driving factors of the strategy and to take these into account. Due to the high allocation weighting of the risk parity strategy in the field of bonds (esp. long-term bonds) they were able to perform exceptionally well by the secular trend in interest rates in recent decades. Whether this can be extrapolated to the future remains open.

MYRA Capital as an expert for forecast-free strategies has released studies on the topic of risk parity that have been published by various specialized media. We will gladly provide you with a German copy, please contact us!

Risk Parity – eine Modeerscheinung unterschätzt ihren blinden Fleck (Schuller, Kula, 2012)

Risk-Parity. Der blinde Fleck wird sichtbar (Schuller, Kula, 2013)

 

You are interested in risk parity investment strategies and would like to obtain more information about our concepts? Don’t hesitate to contact us! We are looking forward to your message.

 

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