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Market PerspectiveSummary

    A New Version of Risk Parity

    Co-Chief Investment Officer, Tail Risk Parity, and Senior Portfolio Manager—Quantitative Investment Strategies
    Chief Investment Officer— Quantitative Investment Strategies
    Nobel Laureate, Frank E. Buck Professor of Finance, Emeritus, Stanford University
    April 12, 2013

    Most traditional asset allocation products suffered the same fate as equities during the 2008 credit debacle, leading investors to question their value and embrace risk parity as an allocation method of choice.

    Co-CIO’s, Michael DePalma and Ashwin Alankar, in partnership with Nobel Laureate Myron Scholes, have developed a unique second-generation risk parity approach called Tail Risk Parity, which takes the view that extreme losses pose the greatest investment threat. Tail Risk Parity takes traditional Risk Parity strategies to the next level by focusing on tail risk, instead of volatility, as its key measure of risk.

    We believe that Tail Risk Parity offers an attractive solution for investors seeking balanced investment portfolios that can cost-effectively reduce exposure to tail losses. It seeks to offer:

    • Significant reduction in large losses while retaining more upside than Risk Parity
    • Protection against large losses at times of crisis when investors can least afford them
    • Hedging the risk of large losses more cheaply than using the options market

    An overview of our approach and its merits can be found in the attached white paper.

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