Risk Parity: Does One Size Fit All?

Investors worried about the next market downturn are searching for unique ways to diversify their portfolios, and risk parity, a risk-based multi-asset strategy, continues to be an area of interest. Yet, some potential investors remain concerned about the likelihood of rising interest rates and the impact of the higher exposures to bonds that can be found in some traditional risk parity portfolios.

In fact, not all risk parity portfolios are constructed in the same manner. At First Quadrant, for instance, we take the view that risk parity is not always optimal and leveraged bonds not always necessary. Having an understanding of the different “styles” of risk parity (RP) should help investors better determine how a particular style of risk parity strategy will impact their overall portfolio – and how this impact can change with changing market environments. By carefully choosing a risk parity style, investors may be able to better insulate their portfolios against an end to the extended bull market environment in stocks or bonds. Examining the different styles of risk parity also allows a more accurate comparison to other multi-asset strategies such as Diversified Growth Funds (DGF).

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