Europe’s investors show growing interest for ‘risk parity’, Aquila Capital

European and UK institutional investors show growing, but in some cases limited familiarity of risk parity strategies according to an independent Europewide study, commissioned by alternative investment managers Aquila Capital.

About one third of the 255 European institutional investors surveyed in the UK, the Netherlands, Scandinavia, Switzerland, Germany, Italy, Spain and France, are familiar with the risk parity concept.

Of those familiar with the concept, only 22% have so far allocated part of their portfolio to risk parity strategies and 60% of them have made allocations of under 2.5% to risk parity.

Institutional investors who are invested in risk parity strategies envision either growing the allocation (20%) or keeping it the same (80%). Half of institutional investors who are aware of risk parity, but have not yet invested, would consider introducing the approach to their portfolios.

The preference for asset classes to be included in a risk parity strategy varies strongly across geographies. The survey does, however, reveal an overall preference for equities, followed by fixed income, interest rates and commodities.

“The findings highlight a growing recognition of the value of risk parity strategies. Many investors, however, have not yet grasped their potential as an essential part of a well-constructed institutional portfolio,” said Stuart MacDonald, managing director at Aquila Capital.

According to MacDonald, diversification is the cornerstone of successful investment, but traditional approaches to capital allocation can create unintended portfolio risks.

“The challenge is to build greater awareness of the diversification and risk equalisation concepts that support Risk Parity. Risk Parity strategies can combine highly controlled volatility and truly effective diversification with high levels of liquidity, transparency and scalability, without compromising returns,” he said.

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