Meketa Investment Group examines risk parity, a portfolio framework that balances risk across asset classes rather than allocating capital conventionally. The paper shows how leverage can raise expected returns but magnify rate sensitivity, liquidity needs, and tracking error, with 2022–23 highlighting the strategy’s vulnerability to rising yields.
Risk Parity
Meketa
Frank Benham, Jackson Shaw
Research
13 Pages
Key Takeaways
Risk gets rebalanced: A levered risk parity example uses 299% gross exposure, targeting 8.0% returns versus 7.0% for a traditional 60/40 portfolio.
Rates expose weakness: During the 2022–23 rate hikes, levered risk parity lost 27.1%, almost double the traditional portfolio’s 13.9% decline.
Tracking error matters: Meketa estimates 8.9% tracking error for levered risk parity versus 4.1% for a traditional allocation relative to peers.
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