- Despite the fact that the risk parity approach has some disadvantages over other risk based asset allocation strategies, if offers investors an attractive risk/return profile and has, therefore, clearly a competitive edge over traditional balanced portfolios.
- Nevertheless, it can be quite dangerous to think that this strategy is a free lunch, since most risk parity funds/ETFs have not experienced a significant drawdown so far.
- In our article, we review a hypothetical risk parity portfolio that consists of three risk balanced asset clusters (equity, commodity and fixed income), whereas within each bucket all single securities are also being weighted according to the risk parity approach.
After a decade of extremely high macroeconomic uncertainties and increased volatility within the stock markets, investors have started to re-think their traditional asset allocation models that have often fallen short of expected returns/losses. For that reason, new risk-based portfolio construction techniques like “Risk Parity” have become extremely popular among researchers and investors. For example, the Invesco Balanced-Risk Allocation Fund (ABRIX) just recently passed USD 1.5 billion in size while the AQR Risk Parity (AQRIX) has swollen nearly to USD 1 billion. After such a success, even Global X has filed paperwork with the SEC for a “Global X Risk Parity ETF”.