Risk parity

Risk premia parity
Risk parity (or risk premia parity) is an approach to investment portfolio management which focuses on allocation of risk, usually defined as volatility, rather than allocation of capital.wikipedia
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Bridgewater Associates

All WeatherBridgewater Associates LP
Some of its theoretical components were developed in the 1950s and 1960s but the first risk parity fund, called the All Weather fund, was pioneered in 1996. According to Bob Prince, CIO at Bridgewater Associates, the defining parameters of a traditional risk parity portfolio are uncorrelated assets, low equity risk, and passive management.
Bridgewater Associates began as an institutional investment advisory service, graduated to institutional investing, and pioneered the risk parity investment approach in 1996.

Invesco

Invesco LimitedAmvescapInvesco Ltd.
In time, other firms such as Aquila Capital (2004), Northwater, Wellington, Invesco, First Quadrant, Putnam Investments, ATP (2006), PanAgora Asset Management (2006), BlackRock (2009 - formerly Barclays Global Investors), 1741 Asset Management (2009), Neuberger Berman (2009), AllianceBernstein (2010), AQR Capital Management (2010), Clifton Group (2011), Salient Partners (2012), Schroders (2012), Natixis Asset Management (2013) and Allianz Global Investors (2015) began establishing risk parity funds.
Later that year, it was reported that Invesco had plans to introduce a Risk parity commodity fund according to regulatory filings.

Putnam Investments

PutnamPutnam FundPutnam Management
In time, other firms such as Aquila Capital (2004), Northwater, Wellington, Invesco, First Quadrant, Putnam Investments, ATP (2006), PanAgora Asset Management (2006), BlackRock (2009 - formerly Barclays Global Investors), 1741 Asset Management (2009), Neuberger Berman (2009), AllianceBernstein (2010), AQR Capital Management (2010), Clifton Group (2011), Salient Partners (2012), Schroders (2012), Natixis Asset Management (2013) and Allianz Global Investors (2015) began establishing risk parity funds.
Putnam also has a Risk parity strategy called the Putnam Total Return.

AQR Capital

AQR Capital ManagementLiew, John M.
In time, other firms such as Aquila Capital (2004), Northwater, Wellington, Invesco, First Quadrant, Putnam Investments, ATP (2006), PanAgora Asset Management (2006), BlackRock (2009 - formerly Barclays Global Investors), 1741 Asset Management (2009), Neuberger Berman (2009), AllianceBernstein (2010), AQR Capital Management (2010), Clifton Group (2011), Salient Partners (2012), Schroders (2012), Natixis Asset Management (2013) and Allianz Global Investors (2015) began establishing risk parity funds.
AQR was one of the first investment managers to offer a risk parity strategy, which aims to balance allocations based on underlying risk rather than asset classes.

Tail risk parity

Tail risk parity
Tail risk parity is an extension of the risk parity concept that takes into account the behavior of the portfolio components during tail risk events.

Salient Partners

In time, other firms such as Aquila Capital (2004), Northwater, Wellington, Invesco, First Quadrant, Putnam Investments, ATP (2006), PanAgora Asset Management (2006), BlackRock (2009 - formerly Barclays Global Investors), 1741 Asset Management (2009), Neuberger Berman (2009), AllianceBernstein (2010), AQR Capital Management (2010), Clifton Group (2011), Salient Partners (2012), Schroders (2012), Natixis Asset Management (2013) and Allianz Global Investors (2015) began establishing risk parity funds.
The firm's strategies include emerging markets, real estate investment trusts (REITs), master limited partnership (MLPs) investments, managed futures, risk parity funds, and liquid alternative investments.

Hedge fund

hedge fundshedge fund managerhedge-fund
Hedge fund
Risk parity: equalizing risk by allocating funds to a wide range of categories while maximizing gains through financial leveraging.

Sharpe ratio

risk adjusted returnrisk-adjusted returnSharpe diagonal (or index) model
The risk parity approach asserts that when asset allocations are adjusted (leveraged or deleveraged) to the same risk level, the risk parity portfolio can achieve a higher Sharpe ratio and can be more resistant to market downturns than the traditional portfolio.

Investment

investmentsinvestingcapital investment
Risk parity can also be a generalized term that denotes a variety of investment systems and techniques that utilize its principles.

Financial crisis of 2007–2008

global financial crisis2008 financial crisisfinancial crisis of 2007–08
Interest in the risk parity approach has increased since the late 2000s financial crisis as the risk parity approach fared better than traditionally constructed portfolios, as well as many hedge funds.

Asset allocation

asset classallocationasset classes
Risk parity is a conceptual approach to investing which attempts to provide a lower risk and lower fee alternative to the traditional portfolio allocation of 60% stocks and 40% bonds which carries 90% of its risk in the stock portion of the portfolio (see illustration). The risk parity approach attempts to equalize risk by allocating funds to a wider range of categories such as stocks, government bonds, credit-related securities and inflation hedges (including real assets, commodities, real estate and inflation-protected bonds), while maximizing gains through financial leveraging.

Stock

equitiesequityshares
Risk parity is a conceptual approach to investing which attempts to provide a lower risk and lower fee alternative to the traditional portfolio allocation of 60% stocks and 40% bonds which carries 90% of its risk in the stock portion of the portfolio (see illustration).

Bond (finance)

bondsbondbond issue
Risk parity is a conceptual approach to investing which attempts to provide a lower risk and lower fee alternative to the traditional portfolio allocation of 60% stocks and 40% bonds which carries 90% of its risk in the stock portion of the portfolio (see illustration).

Inflation

inflation rateprice inflationfood inflation
The risk parity approach attempts to equalize risk by allocating funds to a wider range of categories such as stocks, government bonds, credit-related securities and inflation hedges (including real assets, commodities, real estate and inflation-protected bonds), while maximizing gains through financial leveraging.

Hedge (finance)

hedginghedgehedged
The risk parity approach attempts to equalize risk by allocating funds to a wider range of categories such as stocks, government bonds, credit-related securities and inflation hedges (including real assets, commodities, real estate and inflation-protected bonds), while maximizing gains through financial leveraging.

Leverage (finance)

leverageleveragedfinancial leverage
The risk parity approach attempts to equalize risk by allocating funds to a wider range of categories such as stocks, government bonds, credit-related securities and inflation hedges (including real assets, commodities, real estate and inflation-protected bonds), while maximizing gains through financial leveraging.

Passive management

passive investmentpassively managedpassive investing
According to Bob Prince, CIO at Bridgewater Associates, the defining parameters of a traditional risk parity portfolio are uncorrelated assets, low equity risk, and passive management.

Coordinate descent

block-coordinatecoordinate ascentcoordinate-wise optimization
The above minimization problem can be efficiently solved by the cyclical coordinate descent method, an open source implementation of which is available in JavaScript.

Nobel Prize

NobelNobel laureateNobel laureates
The seeds for the risk parity approach were sown when economist and Nobel Prize winner, Harry Markowitz introduced the concept of the efficient frontier into modern portfolio theory in 1952.

Harry Markowitz

MarkowitzHarry M. MarkowitzHarry M. Markowitz Award
The seeds for the risk parity approach were sown when economist and Nobel Prize winner, Harry Markowitz introduced the concept of the efficient frontier into modern portfolio theory in 1952.

Efficient frontier

The seeds for the risk parity approach were sown when economist and Nobel Prize winner, Harry Markowitz introduced the concept of the efficient frontier into modern portfolio theory in 1952.

Jack L. Treynor

Jack TreynorJack Lawrence Treynor
The theoretical analysis of combining leverage and minimizing risk amongst multiple assets in a portfolio was also examined by Jack Treynor in 1961, William F. Sharpe in 1964, John Lintner in 1965 and Jan Mossin in 1966.

William F. Sharpe

William SharpeBill Sharpe
The theoretical analysis of combining leverage and minimizing risk amongst multiple assets in a portfolio was also examined by Jack Treynor in 1961, William F. Sharpe in 1964, John Lintner in 1965 and Jan Mossin in 1966.

John Lintner

Professor John V. Lintner
The theoretical analysis of combining leverage and minimizing risk amongst multiple assets in a portfolio was also examined by Jack Treynor in 1961, William F. Sharpe in 1964, John Lintner in 1965 and Jan Mossin in 1966.

Jan Mossin

The theoretical analysis of combining leverage and minimizing risk amongst multiple assets in a portfolio was also examined by Jack Treynor in 1961, William F. Sharpe in 1964, John Lintner in 1965 and Jan Mossin in 1966.