Does Risk Parity Maximize Risk-Adjusted Returns? |

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Does Risk Parity Maximize Risk-Adjusted Returns?

The risk and return properties of the indices in which it invests

Earlier, we published a post investigating how risk parity funds performed immediately after the British voted to leave the European Union. We observed that the six risk parity funds with publicly available daily returns data had large drawdowns on June 24, 2016, immediately following the British vote. Four months later, we headed toward the US elections. The equity and credit markets demonstrated positive performance, and the rest of the asset classes that risk parity funds typically invest in (commodities and fixed income) haven’t fared so well, as shown in the chart below. The diversified nature of risk parity funds however, has helped returns remain positive, despite the increased market volatility of the last couple of months.

Risk parity implementation starts from the observation that while a traditional 60/40 stock/bond portfolio appears well diversified, equities are a lot more volatile than fixed income securities. Hence, the risk from equities dominates.

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