Global Risk Parity
Risk Parity is often touted as an alternative or additional strategy alongside a traditional 60/40 portfolio of equites and bonds. In its simplest terms It’s a portfolio built by allocating asset class weights based on “risk” measured by volatility rather than dollar weights in portfolios. Further nuances may include use of a mean variance algorithm or other means to optimize the portfolio weights to also seek diversification through variance or correlation over a defined time frame.
This is an alternative to the well-worn 60/40 portfolio which is arguably over exposed to equities and lacks true balance. By example a 60% exposure to equities and a 40% exposure to bonds equates roughly to about 90% of a portfolio’s volatility coming from Equities. Equity portfolios can drop like a rock and 50% drawdowns can happen. Further with low interest rates the ability of bonds to offset or cushion a meaningful drawdown in stocks is not as powerful as it was when interest rates were higher. The Global Risk Parity Portfolio is designed to lessen equity exposure and more equally weight volatility.
Our Risk Parity Portfolio strategy is designed to take advantage of a broad array of asset classes to include asset classes that are selected to perform in a broad range of economic environments.The goal is a market agnostic strategy with a sound risk/reward profile.This strategy takes the position that no one knows what will be a good or bad assets to own over any given time frame but by assessing the risk of assets and by altering exposure and keeping comparable risk amongst assets we can maintain diversification. That is the backbone of why diversification is important.
We also can apply a strategic overlay and reduce exposure to underperforming asset classes.However, we will likely always maintain some positive weight in all asset classes but lessen our exposure to persistent negative trends.
In this Portfolio we do not manage the portfolio based on what we expect markets to do but rather rebalance to achieve a constant strategic asset allocation mix.There is no precision to this process as this portfolio takes the position that it is impossible to predict the future. Fortunately, rather than create this Portfolio in a Hedge fund we are able to do it in individual accounts using ETFs and/or mutual funds where we eliminate reliance on Counter Party risk and Derivatives, etc.
While markets are for the most part efficient they can be very difficult to beat.This strategy is designed to accept that reality and optimized to provide positive returns in most environments.