Over the past three years, advisors have witnessed the growing popularity of a global allocation and risk management strategy known as "risk parity."
One of the principal reasons for this growing interest, according to Salient Partners CIO Lee Partridge, relates to the negative experiences many investors have had for more than 12 years with more traditional asset allocation models and additional frustrations with certain alternative investment strategies that often did little to ameliorate those experiences.
The basic concepts underpinning risk parity may generally be described as (1) an effort to distribute risk equally across key elements of a portfolio that are not only lowly correlated with one another but also linked in different ways to certain economic drivers such as growth, inflation or sentiment, and (2) the targeting of a consistent level of portfolio volatility regardless of changing market conditions.
Here are seven facts that advisors and their clients need to know about risk parity.
Source: Lee Partridge, CIO, Salient Partners