just finished my Friday night backtests - risk parity does seem to perform pretty well a lot of the times. So when does it not?
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its my pleasure. risk-parity breaks down to being agnostic about risk factors and weighing them equally (tautology is useful sometimes) so the more granular you get the better you can express it. thats all there is to it really. at least in my opinion.
A few thoughts I have about risk parity (disclaimer, I don’t manage a risk parity strat except for a very simple one in my PA so I am likely missing some things).
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The hardest bit to get right is inflation exposure. It’s tempting to ignore this since you haven’t needed it for the last 30 years and stocks + levered bonds have done really well. But look at the performance of stocks + levered bonds from 1970-1985 to see how bad it could get.
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You get inflation exposure two ways — inflation linked assets (TIPS, gilt linkers, inflation swaps) and commodities. TIPS/linkers should in theory do we in a risk off environment (diversifying stocks) but in practice it’s trickier than that since risk off environments can be
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