Risk

More European institutional investors prepared to explore risk parity

Wed, 12/12/2012 - 06:03

UK and European institutional investors have revealed a growing, but in some cases limited, familiarity of risk parity strategies, according to an independent Europe wide study commissioned by Aquila Capital.

About one third of the 255 European institutional investors surveyed, from the UK, the Netherlands, Scandinavia, Switzerland, Germany, Italy, Spain and France, are familiar with the risk parity concept.

Of those familiar with the concept, only 22 per cent have so far allocated part of their portfolio to risk parity strategies and 60 per cent of them have made allocations of under 2.5 per cent to risk parity. In the UK, 14 per cent of those aware of risk parity use the strategy, all of whom have allocated between 2.5-5 per cent of the portfolio to the concept.

Institutional investors who are invested in risk parity strategies envision either growing the allocation (20 per cent) or keeping it the same (80 per cent). 50 per cent of institutional investors who are aware of risk parity, but have not yet invested, would consider introducing the approach to their portfolios.

The preference for asset classes to be included in a risk parity strategy varies strongly across geographies. The survey does, however, reveal an overall preference for equities, followed by fixed income, interest rates and commodities. These trends are mirrored in the UK market.

Stuart MacDonald, managing director at Aquila Capital says: “The findings highlight a growing recognition of the value of risk parity strategies. Many investors, however, have not yet grasped their potential as an essential part of a well-constructed institutional portfolio. Diversification is the cornerstone of successful investment, but traditional approaches to capital allocation can create unintended portfolio risks. The challenge is to build greater awareness of the diversification and risk equalisation concepts that support risk parity. Risk parity strategies can combine highly controlled volatility and truly effective diversification with high levels of liquidity, transparency and scalability, without compromising returns.

“Risk parity strategies have proven themselves through the different phases of market uncertainty, both before, during and since the Crisis. Aquila was one of the first investment managers to identify the opportunities in risk parity. Our risk parity strategies - through the AC Risk Parity 7, 12 or 17 funds or through Aquila’s ability to provide customised risk parity solutions - have consistently delivered strong risk-adjusted returns since 2004. This includes, for example, strong positive returns in 2008.”


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