Interesting article in the WSJ about risk parity funds this morning. We are big believers in the approach but as the article points out there are some problems—high use of leverage, large exposure to bonds in a low rate environment, not taking macro risks into account.
To some critics, the funds’ assumptions about risk and their use of leverage are lingering concerns. Leverage can backfire on investors if not managed properly. Some watchers also believe the bond rally is coming to an end, which could hurt risk-parity funds’ returns as well.
We have developed our own risk parity strategy using tactical asset allocation (expect a research report out about this shortly) that addresses these concerns. We also use the risk parity concept in a few of our strategies.