Investment research boutique Elston has teamed up with risk management firm Millman to launch a multi-asset Dynamic Risk Parity Index which tracks 14 ETFs across the major asset classes.
The Elston Strategic Beta Dynamic Risk Parity (ticker ESBDRP) tracks the ETFs across the asset classes of fixed income, property, gold, UK equities and international equities. The index rebalances monthly and can track a maximum of 15 ETFs.
Henry Cobbe, head of research at Elston, says the index provides a systematic approach to risk-based diversification. “Indices are evolving from simple building blocks into dynamic strategies to provide lower cost alternatives to an investor’s diversification toolkit,” he said.
“The Dynamic Risk Parity index offers a systematic approach to risk-based diversification in a way that is convenient, transparent and liquid.”
The index provides a weighted approach for achieving risk-based rather than asset-based diversification. The product is at present only available to UK investors. It 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.
Elston says that by using a risk-based approach to asset allocation a more systematic approach to diversification is created that uses transparent, liquid and low-cost ETFs as the underlying securities.
The product has been developed with Millman Financial Risk Management. “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,” said Neil Dissanayake, director of European trading at Milliman.
Cobbe said the new index could 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 could also be used to provide systemic dynamic overlay to complement a fixed-weight asset-based approach.