Interesting news that Global X is launching a risk parity fund. (Filing here via Index Universe.) Risk parity is certainly one of the big buzzwords/phrases/concepts in the investment community this year. (Not surprising given the monster year in bonds.) My speech in NYC was on some interesting risk parity extensions, and hopefully I can write it up before year end.
If Global X is smart they will list this with a really low fee (<50 bps) in which case it could be a great public alternative to all of the big private shops doing it (and a few mutual funds as well). I haven’t spent much time teasing out all of the portfolio construction methodology yet so will reserve judgement.
As an amusing aside, I actually used to own the domain riskparity.com before selling it earlier in the year. Of course I wish I knew I was selling it to a multi billion $ hedge fund when negotiating!
And a short history of risk parity from Mr. Wiki:
History
“The seeds for the risk parity approach were sown when economist and Nobel Prize winner, Harry Markowitz introduced the concept of the efficient frontier into modern portfolio theory in 1952. Then in 1958, Nobel laureate James “Bill” Tobin concluded that the efficient frontier model could be improved by adding risk-free investments and he advocated leveraging a diversified portfolio to improve its risk/return ratio. The theoretical analysis of combining leverage and minimizing risk amongst multiple assets in a portfolio was also examined by Jack Treynor in 1961, William Sharpe in 1964, John Lintner in 1965 and Jan Mossin in 1966. However, the concept was not put into practice due to the difficulties of implementing leverage in the portfolio of a large institution.
According to Joe Flaherty, senior vice president at MFS Investment Management, “the idea of risk parity goes back to the 1990s”. In 1996, Bridgewater Associates launched a risk parity fund called the All Weather asset allocation strategy which attempted to “achieve consistent performance” and equalize risk by correlating diversification (such as global inflation-linked bonds and global fixed income assets) with exposure to different economic drivers, such as inflation and economic growth. The initial impetus for the All Weather fund was to establish a family trust for the founder of Bridgewater Associates. Although Bridgewater Associates was the first to bring a risk parity product to market, they did not coin the term. Instead the term, risk parity was first used by Edward Qian, of PanAgora Asset Management, when he authored a white paper in 2005. The term was later co-opted by the asset management industry and evolved into a portfolio investment category. In time, other firms such as AQR Capital, Aquila Capital (2004), Northwater, Wellington, Invesco, First Quadrant, Putnam Investments, ATP (2006), PanAgora Asset Management (2006), AllianceBernstein (2010) and the Clifton Group (2011) began establishing risk parity funds.”
Some risk parity mutual funds (that tend to be expensive):
Managers AMG FQ Global Essentials Fund (MMAVX)
AQR Risk Parity (AQRNX)
Diversified Risk Parity (DRPAX)
Putnam Dynamic Risk Allocation (PDREX)
Invesco Balanced-Risk Allocation Fund (ABRZX)
Huge listing of risk parity related literature below (most are PDFs). If I missed any great ones send me a link and I’ll add:
ai CIO website has a treasure trove of risk parity articles. Sample from their great magazine here.
Diversification and Risk Management – First Quadrant
At Par with Risk Parity? – Kunz, Policemen’s Fund of Chicago
Balancing Betas – FQ
Counter-Point to Risk Parity Critiques – FQ
I Want to Break Free – GMO
RISK PARITY: IN THE SPOTLIGHT AFTER 50 YEARS – NEPC
Leverage Aversion and Risk Parity – Asness
The Biggest Mistake In Investing – Bridgewater Associates
The Hidden Risks of Risk Parity Portfolios – Inker GMO
Engineering Targeted Returns and Risks – Bridgewater Associates
Global Asset Allocation & Risk Parity – Richmond Retirement
Risk Parity White Paper – Meketa Investment Group
On the Properties of Equally–Weighted Risk Contributions Portfolios – Maillard et al
Demystifying Equity Risk–Based Strategies: A Simple Alpha Plus Beta Description – Carvalho et al
Chasing Your Own Tail (Risk) – AQR
Risk Parity Portfolios™: The Next Generation – PanAgora
