Risk Parity Fundamentals
Collection of white papers about different aspects of Risk Parity investing in book form. Parts are indeed instructive and interesting, but the book is mistitled. Not really at the “fundamental” level – more like a collection of different advanced topics within Risk Parity. Also, some of the chapters are reprints of Qian’s previous papers, so if you’ve read those, you probably can skip this.
Read the original:
Important Points for the RP Investor:
Since it’s a book, it would be too much to encapsulate in any summary. Here, though is a brief look at the chapters:
Chapter 1: Excellent chapter with definition and explanation of basic terms: risk, risk contribution, and risk parity investing. Distinction between traditional asset allocation (based on a mean-variance optimization process) and risk parity allocation.
Chapter 2: Discussion of three separate risk premiums in investing (equity risk, interest rate risk, inflation risk) and how different asset classes are exposed to them.
Chapter 3: About bonds, especially on criticism of Risk Parity as a strategy dependent on rising bond prices/falling bond yields, and vulnerable if that shifts.
Chapter 4: Explains diversification at length, answer to some common criticisms and misunderstandings of risk parity in the professional investment world. Definitely worth the read.
Chapter 5: In depth look at leverage, and how it is important to a risk parity portfolio. Section 5.3 introduces the risk parity benchmark allocation, the inspiration for the Qian sample portfolio.
Chapter 6: A look at Risk Parity portfolios in a historical context, with focus on 1994 (when the bond market “crashed”), May and June of 2013 (equities, bonds, and commodities all went down together), Japan since the 1990s, and finally, the inflation era of the 1970s.
Chapter 7: Focuses on the implementation of risk parity portfolios by professional investment managers. Some information about benchmarks and how to tell if a portfolio that claims it is risk parity actually is.
Chapter 8: Concluding chapter that covers diversification within asset classes, not just among them.
Final word: this is probably only a book if you are REALLY interested in some advanced aspects of risk parity. If you do get it, probably the chapters to focus on are 1, 4, and 6.
Edward Qian is the Chief Investment Officer for the Multi Asset Group at PanAgora Asset Management. Here is his biography page, and a list of his papers. Qian also wrote one of the Top 10 Risk Parity Resources. Please see my summary here.