Is the exchange-traded fund world ready for risk parity? We’ll soon find out after the recent launch of the RPAR Risk Parity ETF (RPAR), a product from an investment management firm with past ties to hedge fund manager Bridgewater Associates, a leader in the risk-parity space.

RPAR is the first ETF from Advanced Research Investment Solutions (ARIS), a $12 billion Los Angeles-based wealth management and consulting firm co-founded in 2014  by Alex Shahidi, formerly an institutional consultant at Merrill Lynch, and Damien Bisserier, previously a senior investment associate at Bridgewater.

The RPAR fund tracks the Advanced Research Risk Parity Index, which was developed in-house and allocates across four major asset classes: global equities, Treasuries, commodities and Treasury Inflation-Protected Securities (TIPS).

The goal of risk parity is to balance across different asset classes to produce positive returns that are less volatile than relying on a single asset class.

At launch, and at each quarterly rebalancing, the RPAR portfolio will be roughly allocated to 25% global equities, 25% commodities, 35% long-duration TIPS and 15% long-duration Treasuries.

“It's allocating to each of those roughly equally from a risk perspective,” Shahidi says.

The four asset classes in RPAR were selected because they respectively tend to do well and poorly in different environments. Over the past 20 years, Shahidi notes, equities were negative during the first half of that period and have done exceptionally well during the past 10 years, while the other three asset classes have had their ups and downs.

While RPAR tracks an index, its prospectus says it’s an actively managed product. “It’s actively managed in that it gives us flexibility to implement it efficiently, but it will closely track the index in terms of allocations to each of the major asset classes,” Shahidi says. “Effectively, it’s like an index fund.”

There are 38 U.S.-listed ETFs based on liquid alternative strategies, according to ETFdb. But RPAR is the first U.S. ETF focused on risk parity. The Horizon Global Risk Parity ETF (HRA), which launched three years ago, is listed on the Toronto Stock Exchange.

The risk-parity concept has been around for more than 20 years and has become popular among hedge funds, pension funds and mutual funds, particularly since the financial crisis. In principle, risk parity should make money—or at least have smaller losses than the equity market—most of the time. But the strategy hit some rough patches in the middle years of this decade due to various factors including a sell-off in the bond market resulting from the “taper tantrum” reaction after the Federal Reserve in 2013 suggested it might start reducing its quantitative easing program. Risk-parity funds often use leverage to increase returns on bond investments, which can magnify bond losses.

In addition, commodities were slammed when oil prices plunged and other commodities hit the skids, which put a big hurt on many risk-parity funds and caused them to underperform the broader market. 

It has been reported that some investors are questioning the efficacy of their risk-parity investments because they haven’t met return expectations over the short term. But proponents of risk parity say investors need to evaluate the strategy over long time periods of 10 to 20 years.

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