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Article

Balancing Asset Growth and Liability Hedging through
Risk Parity

Edgar E. Peters
The Journal of Investing Spring 2011, 20 (1) 128-136; DOI: https://doi.org/10.3905/joi.2011.20.1.128
Edgar E. Peters
is a partner and co-director of Global Macro at First Quadrant in Pasadena, CA.
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Abstract

In this article, the author shows that risk parity strategies offer liability-hedging benefits in addition to exposure to growth assets. Risk parity portfolios are typically levered so that risks can be balanced across asset classes. The effect of doing so effectively levers low-risk assets like bonds and de-levers high-risk assets like stocks. The effective leverage of the bond component increases its duration, giving many risk parity portfolios durations similar to those of defined-benefit plans. This is not liability-directed investment, which targets a particular liability, but it does give liability-hedging properties, which other investment strategies typically do not offer. In addition, this study shows that periods of high and low volatility can affect the ability of a static mix of assets to effectively hedge liabilities.

  • Copyright © 2011 First Quadrant, L.P. All rights reserved. Not to be reproduced or redistributed without permission.
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The Journal of Investing: 20 (1)
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Balancing Asset Growth and Liability Hedging through
Risk Parity
Edgar E. Peters
The Journal of Investing Feb 2011, 20 (1) 128-136; DOI: 10.3905/joi.2011.20.1.128

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Balancing Asset Growth and Liability Hedging through
Risk Parity
Edgar E. Peters
The Journal of Investing Feb 2011, 20 (1) 128-136; DOI: 10.3905/joi.2011.20.1.128
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    • PROBLEMS WITH “POLICY” PORTFOLIOS
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