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.

Published In

Alternative Investment Analyst Review

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Hypothetical performance results have many inherent limitations, some of which, but not all, are described herein. The hypothetical performance shown was derived from the retroactive application of a model developed with the benefit of hindsight.  Hypothetical performance results are presented for illustrative purposes only.


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