Risk Parity Strategies Adapt to Higher Rate Volatility
Risk parity is back on the agenda for portfolio managers as volatility scaling, leverage costs and correlation changes the risk calculus.
Risk parity portfolios are adjusting to a regime in which bonds are more volatile and less reliable as diversifiers. Higher financing costs also change the economics of leveraged implementations.
The framework remains useful, but investors should stress-test assumptions about bond diversification.
The main risk is rising correlations and higher funding costs. Investors should watch realized volatility, correlation matrices and financing costs in the sessions ahead.
This article is provided for information and educational purposes only and does not constitute investment advice. Market conditions can change, and past performance is not a guarantee of future results.