The first risk parity ETF (Ticker: RPAR) was launched in December 2019 and in just 6 months, it crosses half a billion in assets. Once accessible only to institutions and high net worth individuals, risk parity funds are now available to retail through Robo-Advisors and even ETFs. Since its success, there are now many other funds that adopt the same approach in one way or another. Ray Dalio was, however, the first person that launches a risk parity hedge fund in 1996. It centers on Modern Portfolio Theory which was conceived by Harry Markowitz in the 1950s. It is not a novel approach and neither was Ray Dalio the person that came up with the theory. We call this risk-based allocation and risk parity is one of them. But instead, if you say you will allocate such that half the risk is in stocks and the other half in bonds, then get ready to see blank faces. And trust me, they will get what you mean instantly. You can tell someone you are going to put half their money in stocks and the other half in bonds. They are popular because they are simple to understand and easy to implement. The common ones are your 50/50 or 60/40 stocks/bonds portfolio. The bulk of the world outside the hedge fund industry still revolves around traditional capital-based allocation. What I am going to talk about in this post is not Ray Dalio’s risk parity, but more generally about the strategy. When it comes to implementation, it varies from one fund to another. It does, however, sound more appealing and intuitive to the laymen who are often more concerned about the results than the process.īefore I proceed, I want to highlight that Risk Parity is just a generic name for an asset allocation methodology. So “All Weather” is not something exclusive to Risk Parity. But to be fair, many other strategies share the same objective. To put it simply, Risk Parity is the strategy, and “All Weather” is the target outcome. They are related but not exactly the same thing.
That is the name of the fund Ray Dalio ran using risk parity principles. To those that are not familiar with technical terms, perhaps the name “All Weather” rings a bell. Risk parity, an investment strategy made popular by Ray Dalio, has come a long way.
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