London-based investment research firm Elston Consulting has launched a multi-asset index – the Elston Strategic Beta Dynamic Risk Parity Index – that utilizes a dynamic risk-parity weighting methodology.

Henry Cobbe, Head of Research at Elston Consulting.

Risk-parity theory states that optimal diversification is achieved through assigning portfolio allocations which target a balanced contribution of risk from each asset class.

The approach tends to favour allocations across a diverse basket of global asset classes, thereby reducing total portfolio variability under a variety of economic conditions.

The index has been developed in partnership with financial risk managers Milliman and provides exposure to five asset classes – fixed income, property, gold, UK equities and international equities – through the deployment of up to 15 ETFs.

The strategy utilizes Milliman’s volatility correlations model to weight asset classes towards a risk-parity solution, adjusting weightings on a monthly basis as asset risk and correlations change. The index also has a built in volatility limit, shifting to short-duration bonds during periods of market stress.

Henry Cobbe, Head of Research at Elston Consulting, commented, “Indices are evolving from simple building blocks into dynamic strategies to provide lower cost alternatives to an investor’s diversification toolkit. The Dynamic Risk Parity index offers a systematic approach to risk-based diversification in a way that is convenient, transparent and liquid.”

Neil Dissanayake, Director of European Trading, Milliman Financial, added, “We are delighted to support Elston on the launch of this index. Investors large and small are looking for alternative ways to access differentiated returns and manage market risk in a way that is systematic, liquid and efficient.”

Elston says the strategy can be used as a diversifier to provide differentiated risk-return characteristics relative to a traditional asset-based approach as an alternative to a hedge fund.  Alternatively, it can be used to provide systematic dynamic overlay to complement a fixed-weight asset-based approach.