Risk Parity: Methods and Measures of Success

The risk parity asset allocation strategy seeks to build regime-agnostic portfolios designed to achieve financial objectives regardless of the trajectory of future economic environments. The design and subsequent evaluation of quantitative risk parity portfolios often emphasizes historical performance statistics, like Sharpe ratio and drawdowns. While these qualities feature into design and selection decisions, they are insufficient to evaluate how well a given risk parity method may respond to future market scenarios. This is especially true over the limited histories of live strategies, where samples conditioned on different regimes are profoundly inadequate for statistical inference.

In this paper we examine 14 quantitative risk parity methods and an ensemble of methods applied to a comprehensive universe of global futures markets from 1985 through May 2020. In addition to standard performance metrics, we analyze each method with a variety of diversity metrics and observe the stability of performance across each of four economic regimes. We also extend the concept of risk parity to include macro-economic factors applied to the same futures universe, with compelling results.

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