Editor’s Letter

We are pleased to bring you this issue with a special section dedicated to the timely and important topic of risk parity. We would like to thank Ramu Thiagarajan for his outstanding contribution to the issue.

Brian R. Bruce

Editor-in-Chief

The worst recession since the Great Depression decimated pension assets and reversed the value added over many years. Plan sponsors and their consultants realized the dark side of both the explicit and latent correlations of many “diversifying” assets with equities. There has never been a time in recent memory when “policy portfolios” used by allocators (and guided by consultants) have come under worse attack. One alternative that has been advanced and been widely discussed in recent times is the “risk parity” paradigm that attempts to equalize risk contributions from the assets included in the portfolio.

This paradigm seems to have gained considerable attention recently from the allocators. Pensions & Investments reported in April 2010 that at least three large public plans have accepted the arguments implicit in risk parity and made corresponding shifts to their plans. In anticipation of (and in response to) this, investment offerings under this paradigm from many leading asset managers have increased significantly in recent times. While the popularity of this paradigm has never been higher, many questions remain about the theoretical basis of this approach, its ability to continue to deliver superior returns in comparison to other approaches (such as mean-variance or 1/n portfolios), as well as the costs of shifting to this approach.

Brian and I have been asked many of these questions in our interactions with plan sponsors and pension consultants since 2008. We thought it would indeed be very timely to bring together great researchers on this topic and present a special volume to our readers. I was thrilled to have the opportunity to edit this special volume. In the process, I have had the opportunity to interact with some of the best minds in the business on the research, portfolio management, and policy areas of this important topic. I owe a big debt of gratitude to my many friends in the industry and academia who helped me with the review process. I owe a special thanks to my old friend and research partner, Barry Schachter, who worked with me in putting together the summary and review piece that appears in this volume.

I hope the readers find this volume useful in understanding this important topic and that it motivates more research about risk parity’s place in policy portfolio discussions and implementation.

TOPICS: Volatility measures, portfolio construction, analysis of individual factors/risk premia

S. Ramu Thiagarajan

Special Editor

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