Risk Parity vs. Endowment Model vs. Permanent Portfolio

It has been over 5 years and 1,000 posts since I started writing, so I thought I would dig through  the archives and touch on a few of my favorite posts, and maybe some of the dumber/better ideas over the years…but to start, below is the very first post to the blog. For the 2 of you that have been around since the first post Nov 1, 2006 here it is:

Three white papers by Bridgewater and PanAgora to introduce the blog and the topics of post modern portfolio theory and risk-parity…

Engineering Targeted Returns and Risks – Bridgewater

“The Biggest Mistake In Investing” – Bridgewater

“Risk Parity Portfolios” – PanAgora

Risk Parity is certainly in vogue this year – as is any strategy when it is having a great year.  In honor of my first post, below is a video that touches on the topic of risk parity, endowment, and permanent portfolio allocations.  I split this into two videos (Part I is 30 mins, Part II 10 mins).  It then puts a spin on them with a dynamic trend overlay.  At the end of the post is some added info for those looking for more background on risk parity.

I’ll have a few more videos in the coming months on the topics of equity income and currency investing.  If you want to view a larger version you can go to the Screencast website here.

Dynamic Risk Parity Part I

Dynamic Risk Parity Part II

Below is a short history of risk parity from Mr. Wiki:


“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.”

There is now a risk parity index from the good folks at Salient.

Some risk parity mutual funds (that tend to be expensive, average expense ratio of ):

Managers AMG FQ Global Essentials Fund (MMAVX), 1.71%

AQR Risk Parity (AQRNX), 1.20%

Diversified Risk Parity (DRPAX), 2.40%

Putnam Dynamic Risk Allocation (PDREX), 1.90%

Invesco Balanced-Risk Allocation Fund (ABRZX), 1.33%

Interesting news that Global X is launching a risk parity fund.  (Filing here via Index Universe.)

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


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

PanAgora risk parity & Risk Parity Portfolios

The Risk Parity Approach to Asset Allocation – Callan

Risk Parity for the Masses – Steiner