The 'Risk Parity' Phenomenon: An Interpretation

“Risk parity is in the news like never before…….did it bring down financial markets in August?”

CHIEF INVESTMENT OFFICER MAGAZINE
21 OCTOBER, 2015

Three Questions about ‘Risk Parity’ Strategies

A recent survey by Chief Investment Officer magazine indicated that 93 of the 266 responding CIOs currently employ some form of a ‘risk parity’ strategy. Out of these 93 users, 39 confessed that they were “quite” or “extremely” concerned about the recent poor performance of the strategy.

These survey findings raise two questions: 1. What are ‘risk parity’ strategies, and 2. What should we make of the apparent growing concern about their use? This Letter addresses these questions, as well as a more fundamental third one: is there a useful role for these strategies in the management of pension and other long-horizon asset pools?