Retirement

Risk Parity in Target-Date Funds

Topics - Retirement Alternative Investing Risk Parity

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Risk Parity in Target-Date Funds

AQR DC Solutions Series

Target-Date Funds (TDFs) have become the most popular Defined-Contribution (DC) investing vehicle, but several shortcomings should be addressed to more reliably maximize retirement outcomes. We believe that implementing Risk Parity as a sleeve within a TDF can help: It may enhance returns, mitigate risk and reduce portfolio drawdowns.

We recommend allocating to Risk Parity away from equities to maximize equity-risk reduction. Including Risk Parity as a component within a TDF is an effective way for plan participants to gain access to the benefits of the strategy. This method can lessen the participant educational challenges associated with offering it as a standalone investment option.

In this publication, we show more demonstrable results as allocations to Risk Parity increased from 10% to 30%. Ultimately, an allocation to Risk Parity can provide valuable diversification benefits to traditional TDFs and to DC plan participants investing for retirement.

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The information contained herein is only as current as of the date indicated, and may be superseded by subsequent market events or for other reasons. The views and opinions expressed herein are those of the author and do not necessarily reflect the views of AQR Capital Management, LLC, its affiliates or its employees. This information is not intended to, and does not relate specifically to any investment strategy or product that AQR offers. It is being provided merely to provide a framework to assist in the implementation of an investor’s own analysis and an investor’s own view on the topic discussed herein. Past performance is not a guarantee of future results.

 

Hypothetical performance results have many inherent limitations, some of which, but not all, are described herein. Hypothetical performance results are presented for illustrative purposes only.

 

Diversification does not eliminate the risk of experiencing investment loss.

 

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This material is intended for informational purposes only and should not be construed as legal or tax advice, nor is it intended to replace the advice of a qualified attorney or tax advisor.