Investors in risk parity vehicles should beware 'volatility surprises'

Stocked up on equities ahead of the referendum

The period of market turbulence after the UK voted to leave the EU could herald the start of a new cycle of volatility surprises and investors should be wary of events to which risk parity funds are calibrated to adapt, according to investment research firm Markov Processes International (MPI).

The group said prior to the EU referendum on 23 June, risk parity funds had done quite well to reverse most of last year's losses. However, they were surprised by the Brexit result, as they had been positioned for an appreciation of risk assets. Risk parity funds allocate to each asset class based on its volatility, and attempt to spread risk evenly across them, in contrast to traditional allocation methods where a certain percentage is invested in each asset class, such as 60% stocks/40% bonds. MPI said although risk parity funds fared better than 60-40, endowment or 90-10 portfol...