Risk Parity in Target-Date Funds
December 2, 2014
Topics - Retirement Alternative Investing Risk Parity
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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