One of the great advantages and problems with risk parity portfolios has been the cyclical differences between commodities, credits, equities, and bonds. The different cycles for major asset classes are one of the key drivers for diversification. The problem is that an equal risk-weighted long-only portfolio will suffer from the switching in cycles.
The last two years have turned risk parity performance on its head. Instead of seeing commodity drag which has been a problem for a decade, commodities have been a clear winner. However, the volatility equalization means that a similar portion of the portfolio will still be in fixed income and credit which have had underperformance. The 15% volatility institutional risk parity (HFR 15% institutional index) portfolio showed a return of 8.22% through November in 2021.
The return difference between the aggregate bond and benchmark commodity indices was 6% in favor of commodities. A commodity allocation improved any equity and bond asset allocation over the last two years especially if the allocation came from the bond component. While some commodity market gains on supply shocks may revert in 2022, the higher inflation environment still favors commodities.
No comments:
Post a Comment