Asset Allocation: First Quadrant’s Ed Peters Favors Allocating by Risk

Long and Short

Peters has used a risk parity strategy since 2007 (when he was at a prior firm), and it's been offered as one of the strategies at First Quadrant since 2009. For those who prefer to use mutual funds, the risk parity strategy is used in the first Quadrant sub-advised FQ Global Alternatives Fund, MGAIX (institutional class). This is a "global, tactical asset allocation fund" that makes long or short tactical allocations to equities, bonds and currency—allocating according to risk. The fund can use options, futures and forward contracts (derivatives) to make some of the allocations, and to get the desired risk exposures across asset classes, global geography and currencies. Balancing the risk equals "true diversification," Peters emphasizes.

Long Only

One of the other mutual funds that First Quadrant sub-advises is the FQ Global Essentials Fund, MMAFX (institutional class), a "balanced, long-only" fund that invests tactically in stocks, bonds and commodities. This fund uses the "risk parity principles, balancing the risks between stocks and bonds," says Peters.

Where do risk parity strategy funds belong in investors' portfolios? "For a smaller investor, [Global Essentials, the long-only fund] is a good core strategy," Peters explains, because it provides global allocation to stocks, bonds and commodities by risk instead of market cap. Investors, "just can't get greedy in a bull market—[it does] well in a bull market but won't shoot the lights out." Conversely, in a falling market, it is designed to preserve capital better than funds allocated by market cap instead of by risk. It has a "50% correlation, as opposed to most balanced funds," which Peters says "have a 90% correlation with equities."

First Quadrant also sub-advises the FQ Tax-Managed U.S. Equity Fund, an all-cap core tax managed fund, and FQ U.S. Equity Fund, an all-cap core equity fund, both at Managers Investment Group.