Is 2022 All Bad Weather For Risk Parity?
Risk parity strategies can look very different from each other in implementation. They may have different risk budgets, risk targets, asset class buckets or even different definitions of risk. In this particular period, however, the disparity in performance is staggering.
Risk parity strategies are based on the premise of diversification through risk budgeting across asset classes to withstand diverse economic environments. That goal is being challenged yet again in an inflationary environment unseen in over 40 years, combined with growth uncertainty and valuation skepticism weighing on prices further.
Stocks and bonds, the primary ingredients of all balanced portfolios, are both down for the year, -16% for the S&P 500 as of the end of August, and -12% for the ICE BofA Current 10-Year Treasury Index. Global indices are similar or worse.
How then, has risk parity fared as a strategy in this environment? It depends.
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