GAM’s Alternative to Risk Parity Wins Converts
London-based investment firm GAM offers an index product that it says avoids the potential pitfalls of popular risk parity funds.
By Imogen Rose-Smith
Call it the holy grail of investing: a strategy that protects against downside risk and enhances rather than limits returns. Institutional investors have chased that dream since Modern Portfolio Theory took hold in the early 1960s after showing that a mix of assets could cut risk and boost overall results. Given worries about rising interest rates and the chance of another global recession, the quest has taken on even more urgency as institutions seek to insulate their portfolios from disaster.
Since 2008 many of them have turned to a portfolio construction strategy called risk parity. Edward Qian, CIO of Boston-based PanAgora Asset Management, coined the term in a 2005 white paper. Popularized by the likes of $145 billion Bridgewater Associates and $84 billion AQR Capital Management, risk parity is a quantitative and qualitative approach to asset allocation. It builds a diverse portfolio commodities, currencies, equities and debt with an emphasis on risk management. The diversity reduces risk to a greater degree than a typical 60-40 equity and bond portfolio while producing better returns. ....