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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It’s not required but (depending on implementation) you would see 3-5% vol and annual returns of 2-4% + tbills on unlevered risk parity, so you practically always see leverage used. As with any leveraged strategy you can get burned on big short-term drawdowns.
As @NewRiverInvest said, risk parity is a bet that macro factors will be diversified enough that the drawdowns won’t hurt that much over the long run and you can collect equity-like returns for less-than-equity risk.
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Changes in volatility increase the correlation of these macro factors. Is that the reason why RP targets vol?
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