Risk parity

Risk parity is an investment strategy that prioritizes the allocation of risk, typically measured by volatility, over the allocation of capital. This approach aims to balance the risk contribution of each asset in the portfolio, ensuring that each asset contributes equally to the overall portfolio's volatility.

The concept of risk parity was first developed in the 1950s and 1960s, but it gained significant attention in 1996 with the creation of the All Weather fund. Over the years, many investment companies have started offering risk parity funds to their clients, recognizing its potential benefits.

Risk parity portfolios are designed to achieve a higher Sharpe ratio and increased resistance to market downturns compared to traditional portfolios. However, they are also susceptible to significant shifts in correlation regimes, as seen during the COVID-19 sell-off in Q1 2020, which led to the underperformance of risk-parity funds.