Investment research boutique Elston Consulting has launched the Elston Strategic Beta Dynamic Risk Parity Index, which provides a dynamically weighted multi-asset approach for achieving risk-based, rather than asset-based, diversification for UK investors.
The project has been developed in cooperation with Milliman Financial Risk Management.
The objective of the index is to provide a multi-asset strategy that is differentiated, dynamic and diversified.
Elston says the key difference to traditional multi-asset approaches is that the strategy is weighted by the equal contribution to overall risk by each asset class, rather than by asset weights alone. The weights are then dynamically adjusted as asset risk and correlations fluctuate.
Using a risk-based approach to asset allocation creates a more systematic approach to diversification, constructed using transparent, liquid and low-cost ETFs as the underlying securities.
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.
Henry Cobbe, CFA, Head of Research at Elston Consulting says: “We are strong advocates of index investing. 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 (pictured), Director of European Trading, Milliman, says: “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.”