Markowitz’ celebrated optimal portfolio theory generally fails to deliver out-of-sample diversification.

In this note, we propose a new port-folio construction strategy based on symmetry arguments only, leading to “Eigenrisk Parity” portfolios that achieve equal realized risk on all the principal components of the covariance matrix.

This holds true for any other definition of uncorrelated factors.

We then specialize our general formula to the most agnostic case where the indicators of future returns are assumed to be uncorrelated and of equal variance.

This “Agnostic Risk Parity” (AGP) portfolio minimizes unknown-unknown risks generated by over-optimistic hedging of the different bets.

AGP is shown to fare quite well when applied to standard technical strategies such as trend following.

Authors

R. Benichou, Y. Lempérière, E. Sérié, J. Kockelkoren, P. Seager, J-P. Bouchaud, M. Potters

Please enter your details below. The ISTrends Fund Fact Sheet will be sent to your nominated email address


* Required
CAPITAL FUND MANAGEMENT LLP (CFM)
The products, information and other material contained on this website are only directed at investment professionals in Australia. Please note that you will be prevented from purchasing or dealing if you are not eligible for products and services offered within this site. Materials contained within this website have been made available for information purposes only. It does not contain any investment recommendations nor provide investment advice. Neither CFM nor its related entities, directors or officers guarantee the performance of, or the the repayment of capital or income invested. Past performance is not necessarily indicative of future performance. Pursuant to ASIC Class Order 03/1099, CFM LLP, the Investment Manager of the Fund, is exempt from the requirement to hold an AFSL under the Corporations Act. CFM LLP is regulated by the UK Financial Conduct Authority ("FCA") under United Kingdom laws which differ from Australian laws. These financial services are provided only to wholesale clients as defined in subsection 761G(7) of the Act. The information on this website has been prepared on this basis and is for the use of wholesale clients only. It is in no way intended for use by retail clients and should not be distributed to or relied upon by a retail client.
TERMS & CONDITIONS
What is a financial services licensee? A person or entity is a financial services licensee if they hold an Australia financial services licence issued pursuant to the Corporations Act 2001
BY CLICKING ON 'I AGREE', I DECLARE I AM A FINANCIAL SERVICES LICENSEE AS DEFINED IN THE CORPORATION ACT 2001.