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Bailey McCann, Opalesque New York: Risk parity investments have been gaining steady traction with investors over recent months. However, a new research piece out from Evanston Capital seeks to change the idea that risk parity is a hedge fund strategy. Dr. Peter Hecht, Vice President and Senior Investment Strategist with the fund says that risk parity investments represent a strategic asset allocation, but are not in of themselves an allocation to hedged strategies.
"Some people see risk parity as a partial hedge fund program substitute; however, their respective risk/return properties are completely different. Risk parity, if understood and utilized properly within the portfolio as a public market strategic asset allocation, is a legitimate approach for investors," Hecht says.
The report discusses the importance of correlations, not just the Sharpe Ratios (risk-adjusted returns), to achieving an optimality in a risk parity portfolio, and how the return and risk requirements of other approaches have impacted investors’ adoption of risk parity. In practice, people have moved away from classic mean-variance optimization, which requires error-free return and risk estimates, and toward approaches such as risk parity without a complete understanding of why or how the two techniques relate to each other. The paper explains how risk parity actually serv...................... To view our full article Click here
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