(December 14, 2012) — Institutional investors in Europe are growing more familiar with risk parity strategies, and those who learn about it would consider allocating to it, an asset management survey has found.
A third of European investors responding to a recent survey by alternatives manager Aquila Capital said they were increasingly familiar with the strategy and of this group 50% said they would consider allocating to it.
The investment manager surveyed 225 institutional investors in the United Kingdom, the Netherlands, Scandinavia, Germany, and other large European countries. The results concur with aiCIO’s annual risk parity survey, which showed 22% of non-US investors were considering the strategy.
The two surveys also agreed on the level committed to the strategy, showing most investors allocated less than 5% of their overall portfolio to risk parity.
The Aquila survey determined that 80% of investors would maintain their allocation with the remainder increasing their holding. However, the investment managers found only 22% of the third of respondents who were aware of the strategy had actually allocated to the strategy.
Last week, attendees at aiCIO’s inaugural Influential Investors Forum at the Harvard Club discussed the pros and cons of a risk parity approach.
“Our concern about risk parity is that there are not that many risks you need to get paid for taking,” one opponent to the strategy said, adding: “Risk parity seems to absolve the investor from looking at original valuations.”
Another said: “If you lower the risk to reduce the ugly drawdowns, don’t expect great returns.” However, an advocate for the strategy countered: “If there’s more than one asset class that has a risk premium, there should be a balance.”
One of the CIOs on aiCIO’s Power 100 said that once the fund’s trustee board had heard explanations of the strategy by a provider, the board wondered why the investment team were making such a small allocation. This reflects the response to both surveys on the level of allocation.
To read the full aiCIO Risk Parity Survey 2012, click here.