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A New Way to Balance Risk

AQR founder Cliff Asness explains risk parity.

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Risk parity is one of the new ideas to reach mutual funds. Invesco uses the approach in its Balanced-Risk Allocation (ABRZX) and Balanced-Risk Target Date funds. AQR just launched the AQR Risk Parity fund. Its aim is to balance out risk among a number of factors based on recent volatility in those factors.

Its backers say this is a big improvement on the classic 60/40 balanced fund while critics say that it is needlessly complex. GMO's Ben Inker authored a critique; click here to read a portion of it.

What follows is the transcript of Morningstar's question-and-answer session with AQR founder Cliff Asness, in which he explains and defends risk parity.

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Russel Kinnel does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.