So the concept is to allocate into various assets not based on nominal amount, but rather based on risk which you can do using some modicum of leverage. At lot of the happiness embedded in the strategy takes advantage of the low-to-negative correlation between bonds and risk assets. If I had to guess, there is probably about 500 billion invested in that strategy right now, with another few hundred doing it in a discretionary form. Their exact actions depend, obviously, on the exact definition of the "risk parity" and the mandate of the fund. In a classical form, the risk is defined as volatility so if bonds became more volatile you'd had reallocated away from bonds, most likely into equity. So you can easily get a yo-yo type effect where they reallocate into equities, equities sell-off, they reallocate into bonds etc.
All though original Risk Parity concept generally between stocks and bonds based on the risk budget, current day funds are more diversified. AQR risk parity allocates stocks (domestic, international), bonds, currency and commodities based on the risk budget. AQRIX (their risk parity fund) is down about 1% or 4% when compared to 60/40 domestic or 60/40 world index, since rates started to rise.
I don't think I'd consider it a true risk parity portfolio, but I'm the main overseer for an account my partners and I opened earlier in 2018. PM account at IB; did basic modeling with historic drawdowns and volatility to craft something we're comfortable levering up and still being able to stay under the leverage ceiling we're allowed during 2-3 sigma move without much modification. We've got revenue streams from other operations and personal capital that could subsidize the portfolio substantially if it was ever needed. Or just shed some of the shortest maturity stuff we have in a pinch to de-lever without eating too much volatility drag. Some excess liquidity less a buffer comes and goes from other business activities so it's hard to pin down a current return on equity. But between interest charges and losses we're down about 2% of the total asset value we started with, with about half of that coming from US stocks. Anyway, hard to say if this is any better than a typical stock/bond portfolio but at least it's different. Will be interested to get a few years on this and see how the R/R profile compares in reality. Hard to feel super bullish about anything for the time being.
%% And unusual large %% gain, going into SEPT 1987.Small caps are going down more,again - time will tell if its 30%, in OCT again.Could do -20%;