Graphic: Risk parity's double whammy
Risk-parity strategies, which target specific volatilities by investing across various asset classes, have not fared well this year as equities, bonds and commodities have all headed south. While implementation varies across funds, a key component is the use of leverage to get the targeted risk, particularly for the fixed-income component. However, given the diverse approaches to risk parity and leverage, manager and strategy selection remain key considerations.
Short-term woes: Over the past year, risk-parity strategies have had higher than targeted volatility, based on the various S&P Risk Parity indexes.*
S&P Risk Parity index performance
Underlying assets: Commodities had the highest volatility over the past year through Sept. 30, followed by the Russell 3000 index. Fixed income had the lowest volatility. Over 10 years, domestic equities had the highest volatility, followed by international stocks and commodities.
Index performance
Longer term: Launched in 2018, the S&P Risk Parity indexes have higher than targeted volatilities over the three years ended Sept. 30. Ten-year volatility falls in line with targets and has been backtested.
Long-term S&P Risk Parity index performance
Meeting expectations: Using the HFR Risk Parity Institutional indexes, based on actual fund performance, longer-term volatility falls in line with the targets, although it is higher for shorter periods.
HFR Risk Parity index performance
*Indexes based on underlying assets. **Through Oct. 26. Sources: S&P Dow Jones Indices LLC, Bloomberg LP, HFR Inc.
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