S&P DJI launches multi-asset risk-parity indices

Aug 9th, 2018 | By | Category: Alternatives / Multi-Asset

S&P Dow Jones Indices (S&P DJI) has launched the S&P Risk Parity Indices, a family of strategy indices employing a multi-asset risk-parity approach.

S&P DJI launches multi-asset risk parity indices

S&P DJI launches multi-asset risk parity indices

Risk-parity strategies typically aim to achieve an equal risk contribution from each of the asset classes or individual securities included within the portfolio.

The indices are composed of futures contracts on three asset classes – equity, fixed income and commodities – and use the long-term realized volatility of each to measure risk.

Each index has a target volatility and allocates weights to the asset classes based on its risk and the application of a leverage factor to achieve the defined target volatility.

The family includes three indices:

S&P Risk Parity Index – 10% Target Volatility
S&P Risk Parity Index – 12% Target Volatility
S&P Risk Parity Index – 15% Target Volatility

The equities segment consists of futures on the S&P 500, the Euro Stoxx 50, and the Nikkei 225; the fixed income segment comprises futures on Treasury bonds, gilts, German bunds, German bobls, and Japanese government bonds; the commodities segment covers futures on a range of single commodities across the energy, agriculture, livestock, precious metals, and industrial metals sectors.

Within each asset class, the indices also maintain an equal risk exposure to each individual futures contract. This balanced risk contribution structure is designed to offer diversification that may reduce risk without sacrificing return across different economic cycles.

S&P DJI collaborated with MSR Indices, part of MSR Investments, to develop the indices.

“Through the S&P Risk Parity Indices, risk-parity funds and its managers for the first time can compare performance to a benchmark that embodies the risk/return and asset allocation characteristics of this frequently-used strategy,” said Vinit Srivastava, Managing Director, S&P Dow Jones Indices.

He added, “This is a new development for risk-parity market participants, as they are now empowered with information to measure their fund managers against a relative benchmark and, due to its bottom-up design, have the opportunity for index-based access to risk-parity. We are proud to work with MSR Investments for our first risk parity indices.”

Using back-tested data, S&P DJI compared the historical performance of the indices to a hypothetical traditional 60/40 equity/bond portfolio for the period from January 2003 until May 2018. This hypothetical portfolio combined the S&P Developed BMI with 60% weight and the S&P Global Developed Aggregate Ex-Collateralized Bond Index with 40% weight, rebalanced monthly.

The index provider found that the S&P Risk Parity Indices delivered smoother performance and reduced downside compared with the traditional 60/40 portfolio, particularly during major market shock events such as the global financial crisis, the Europe/Greece debt crisis in 2010, and the downgrade of US debt in 2011.

The indices had on average a Sharpe ratio 41% higher and a return over maximum drawdown 49% higher than the traditional 60/40 portfolio.

Historical performance of the S&P Risk Parity Indices versus a 60/40 portfolio

Risk Parity Indices

Source: S&P DJI.

S&P DJI notes the indices may be used as benchmarks to compare the performance of risk parity fund managers or as underlying reference indices for investment products including ETFs.

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