In 1996, Bridgewater Associates
established the All Weather principles
for asset allocation and in 2004 they
published a seminal piece called
“Engineering Targeted Returns & Risks”
which outlined that process.
In recent years, several prominent
money managers have adopted
versions of the All Weather approach
into their own product offerings, and
recently, the debate on this topic has
surged in the institutional investment
community, taking on the “Risk Parity”
Over the past fifteen years we have communicated and debated our “All Weather”
(or “Risk Parity”) principles with our clients and with the investment community
because we believe that investing in this manner is the best path to investment
success and that the current approach presents unacceptably high risks. Risk Parity
is much bigger than a new investment product for the “investment pie” — it is a
central theme of successful asset management that applies to the entire portfolio.
What is the Risk Parity Approach to Asset Allocation?
In the following article, Bob Prince,
Co-CIO of Bridgewater, explains the
concept of Balance that lies behind the
Risk Parity approach.
Risk parity is about Balance. It is about balancing one’s risk exposures across
multiple sources of return in order to achieve the most consistent performance
possible across all future environments.
Balance cannot be achieved precisely, but it can be reasonably achieved. By that we
mean that Risk Parity is not about being overly precise; in fact, there really is no such
thing as precision in the investment world because investing necessarily deals with
the future, and the future cannot be known in any precise way. Rather, the Risk Parity
approach balances potential future risks to achieve one’s desired level of returns with
as little risk as possible regardless of what scenario unfolds.