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Risk-parity strategies difficult to benchmark

Benchmarking risk-parity strategies is difficult because of the wide range of investments routinely included in portfolios, coupled with differing volatility targets and the degree of leverage the portfolio manager uses to amplify returns.

An analysis of risk-parity benchmarking approaches showed a wide range of returns for time frames ended Dec. 31.

For example, the HFR Risk Parity Vol 10 Institutional index was down 1.26% for the year; five years, up 5.17%; and 10 years, up 8.37%. Returns of Hedge Fund Research Inc.'s index reflect the returns of a group of risk-parity managers.

The S&P Risk Parity Index 10% Target Vol (TR) was up in all periods ended Dec. 31: one year, 0.42%; five years, 3.12%; and 10 years, 6.53%.

Some asset owners use a global 60% equity/40% bond portfolio model constructed with the MSCI ACWI Net TR index and the Bloomberg Barclays Global Aggregate Total Return index as their risk-parity benchmark. For periods ended Dec. 31, the benchmark was down 6% in the year; up 3.1% over five years; and up 6.8% over 10 years.

Multiyear returns are annualized for each benchmark.