S&P Dow Jones Indices has developed a suite of indexes designed to replicate the risk parity strategy first popularized by hedge fund firm Bridgewater Associates.
The indexes — which were constructed using futures contracts for equities, fixed income assets, and commodities — are the first risk parity benchmarks to replicate the strategy itself, according to Vinit Srivastava, a managing director at S&P DJI. Other risk parity indexes simply tracked the funds available in the market, and investors seeking a benchmark to evaluate a risk parity strategy’s performance were settling for a 60-40 mix of stocks and bonds.
“The risk parity strategies already out in the market didn’t have an appropriate benchmark,” Srivastava said. “Asset owners wanted a better way to measure the efficacy of these strategies.”
Another problem identified by S&P DJ was a lack of low-cost risk parity options. Most existing institutional strategies are found at hedge funds like Bridgewater and AQR, and come with hedge fund-style fees. Recently, however, these funds have performed poorly: HFR’s suite of universe-tracking indexes are all down since the beginning of the year.
[II Deep Dive: Bridgewater Associates Suffers Losses in July]
“We’ve seen asset owners dial back from risk parity, but it’s because of the fees,” Srivastava said. “The need for diversification has not gone away.”
Although there are not currently any index funds tied to S&P DJI’s new risk parity benchmarks, Srivastava said the indexes themselves are “investable” in the sense that an investor seeking to build a cheaper risk parity strategy in-house can fully replicate them. The methodology for each index is publicly available online, with their allocations published daily.
Components of each index include futures for stock indexes like the S&P 500, treasury notes and other government bonds, and commodities including metals and oil. They were developed in partnership with MSR Investments, a commodity trading advisor and index provider.
