AQR Capital Management Launches Two Risk Parity Mutual Funds in Global Investment Landscape
The Rise of Risk Parity Funds in the Investment Landscape
Risk parity funds have been gaining attention in recent years due to their unique investment approach that seeks to balance risks rather than asset classes.
AQR Capital Management, a global investment-management firm, has launched two risk parity mutual funds, AQR Risk Parity II MV Fund (Class I/QRMIX) and AQR Risk Parity II HV Fund (Class I/QRHIX), which begin operation on November 5, 2012, and will be distributed through financial advisors only.
The Concept of Risk Parity
Risk parity is an investment strategy that aims to achieve attractive risk-adjusted returns by diversifying investors' exposure to equity risk. It seeks to produce total return rather than asset class returns, which means the funds aim to match their benchmark in terms of return but spread out across different asset classes.
Broadly defined, risk-parity funds balance risks rather than asset classes. A typical risk-parity portfolio begins with less exposure to equities relative to traditional portfolios and invests more in other asset classes. As a result, its risk budget is not concentrated in equities, but spread more evenly across other assets.
The Benefits of Risk Parity Funds
The potential investment benefit of risk-parity funds is that they may provide financial advisors with additional investment choices designed to further diversify and help to create more efficient portfolios. "We want to broaden investors' menus by offering a variety of risk exposures that match their risk profile," said David G. Kabiller, CFA, Co-Founding Partner and Head of Client Strategies at AQR.
The Diversification Benefits
Risk parity funds seek to produce attractive risk-adjusted returns by investing in a globally diversified portfolio of equities, fixed income, and commodities. By spreading out across these asset classes, risk-parity funds aim to reduce correlation between different investments and increase overall portfolio diversification.
Broadly defined, risk-parity funds balance risks rather than asset classes. A typical risk-parity portfolio begins with less exposure to equities relative to traditional portfolios and invests more in other asset classes. As a result, its risk budget is not concentrated in equities, but spread more evenly across other assets.
The Target Volatility Levels
The new funds offer different levels of target volatility to suit the risk preference of different investors. The AQR Risk Parity II MV Fund targets a moderate annualized level of volatility, 10%, while the AQR Risk Parity II HV Fund aims for a higher target annualized level of volatility, 15%.
What's Interesting is
That said, what's interesting about risk parity funds is that they can help advisors better target their particular risk preference: higher risk and higher potential returns or moderate risk and more moderate returns. By spreading out across different asset classes and balancing risks rather than asset classes, risk-parity funds aim to create more efficient portfolios.
Conclusion
The introduction of AQR Risk Parity II MV Fund and AQR Risk Parity II HV Fund marks a significant expansion in the risk parity mutual fund market. These new funds offer investors additional investment choices designed to further diversify and help to create more efficient portfolios.
That said, what's interesting is that risk-parity funds can help advisors better target their particular risk preference: higher risk and higher potential returns or moderate risk and more moderate returns. By spreading out across different asset classes and balancing risks rather than asset classes, risk-parity funds aim to create more efficient portfolios.
Important Details
/10