Risk Parity - What Were We Thinking?

June 4, 2012 / by NEPC

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Risk Parity, a risk-balanced approach to asset allocation now faces critics after years of outperformance as interest rates reach a potential inflection point.  While Risk Parity has a large notional allocation to fixed income, we believe the concept is about balance, not just bonds.  We continue to recommend Risk Parity as a strategic component of diversified asset allocations or the starting point for structuring a total portfolio.  Early adopters of Risk Parity were attracted to its diversification qualities, its overall efficiency of delivering a high expected return with moderate and balanced volatility, and its ability to perform resiliently across various market environments.  In this paper, we explore those original differentiators and explain why the investment thesis supporting Risk Parity remains valid across market environments, including rising interest rates.

Topics: White Paper, Research


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