Risk Parity – What’s in a Name?

Risk Parity funds enjoyed notable fundraising success between 2008 and mid-2013. Investors found the funds’ concept of making money throughout market cycles, whether high or low growth, inflation or deflation, to be quite compelling following the Financial Crisis, only to be surprised midway through last year by an environment unfavorable to investors with exposures to both nominal rates and commodities.

Some see Risk Parity strategies as a valid inclusion in a diversified portfolio, while detracting views range from fundamentally flawed to downright dangerous . What role, then does this strategy have to play? The lively industry discussion, as well as the projected inflows earmarked for these funds (after some outflows in Q1 stemming from 2013’s losses), led us to employ quantitative analysis to take a closer look at some of the characteristics of these enigmatic funds.

We applied MPI’s proprietary Dynamic Style Analysis (DSA) to a set of 40 Act funds employing the strategy and found a surprising disparity between these funds in terms of varying estimated asset exposure and implicit leverage levels. This wide range of risk and exposures defies easy comparison and classification, and warrants investors’ careful consideration when evaluating allocations.