macrocephalopod

well, part of a good risk-parity implementation includes a pure-trend component usually referred to as “commodities” or “CTAs”. so you are right.

in practice, risk parity is *super* resilient if done well. it requires some very large amplitude and short frequency volatility in macro risk factors (real growth, inflation, real-rates, risk-appetite). people love to hate it because its hard to break it.

nice- what are some other components that’d count toward “done well”?

so a big part is narrowing down how you implement risk-contributions. the most common mistake is levering up TRS on AGG vs levering up discrete exposures to duration, linkers, corp-credit. good implementations are more granular so you can effectively tweak exposures to specifics

this makes a lot of sense - will experiment around. thank you for sharing!

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).

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.