Risk Parity Trend — US (RP-US)
Developed by Clare, Seaton, Smith & Thomas · Risk Parity + Trend · Low-Med Risk
Risk Parity Trend was published by Andrew Clare, James Seaton, Peter Smith, and Stephen Thomas in their 2012 SSRN paper (#2126478), combining two well-established portfolio concepts — risk parity allocation and trend following — into a unified framework. The strategy allocates capital across multiple asset classes using inverse volatility weighting, which equalizes the risk contribution of each position, then applies per-asset moving average trend filters that shift individual positions to cash when they enter downtrends.
Traditional risk parity allocates capital based on each asset's volatility rather than by market value or equal weight. Low-volatility assets like bonds receive higher allocations than high-volatility assets like equities, producing portfolios where each position contributes roughly the same amount of risk. This risk-balanced approach has been the foundation of strategies at firms like Bridgewater Associates (whose All Weather fund is the most well-known risk parity implementation) and has attracted hundreds of billions in institutional capital over the past two decades.
Clare and colleagues recognized that while risk parity produces more balanced portfolios than equal or cap-weighted approaches, it provides no mechanism for reducing exposure during sustained bear markets across asset classes. The 2008 crisis affected equities, commodities, and credit simultaneously, and even a risk-balanced allocation suffered meaningful drawdowns. By adding Faber-style moving average filters to each position independently, the strategy can remove declining positions while maintaining exposure to assets still in uptrends — combining risk parity's superior risk budgeting with trend following's drawdown protection.
The US variant applies this framework to a five-asset universe spanning US equities (SPY), emerging market equities (EEM), intermediate bonds (IEF), commodities (DBC), and a fifth diversifying asset. Each asset is weighted by the inverse of its trailing realized volatility, giving bonds and other low-volatility instruments substantially larger portfolio weights than equities or commodities. The ten-month moving average filter then independently evaluates each position, shifting those below trend to cash while maintaining the inverse-volatility weights among remaining positions.
How It Works
Inverse Volatility Weighting
Each month, the trailing realized volatility of each asset is calculated from recent daily returns. Portfolio weights are assigned in proportion to the inverse of each asset's volatility — less volatile assets receive larger allocations, more volatile assets receive smaller allocations. This weighting equalizes the expected risk contribution of each position: a bond position with five percent volatility receives roughly three times the weight of an equity position with fifteen percent volatility.
The inverse volatility approach produces a portfolio that behaves very differently from equal-weight alternatives. In a typical month, bonds might receive forty to fifty percent of the portfolio, with equities, commodities, and other positions sharing the remainder. This heavy bond tilt reduces the portfolio's overall volatility substantially while maintaining exposure to the diversification benefits of non-bond asset classes. The weights adjust monthly as realized volatilities change, automatically reducing exposure to assets experiencing unusual volatility.
Per-Asset Trend Filtering
After determining inverse-volatility weights, each asset is independently checked against its ten-month simple moving average. Assets trading above their moving average retain their calculated weight. Assets below their moving average have their allocation shifted to cash. The freed-up capital remains in cash rather than being redistributed to other assets, maintaining the risk parity principle that each position's risk contribution should be independent of other positions.
This per-asset independence means the portfolio can hold any combination of positions at any time, from fully invested to fully in cash. During sector-specific declines, only the affected asset moves to cash while others maintain their risk-parity-determined weights. During broad bear markets, multiple positions may shift to cash simultaneously, automatically reducing overall portfolio risk proportionally to the breadth and severity of the decline.
The Risk Parity + Trend Combination
The marriage of risk parity and trend following addresses complementary types of risk. Risk parity manages the relative risk contribution of each asset class during normal market conditions, preventing any single position from dominating the portfolio's risk profile. Trend following manages the absolute risk of the portfolio during bear markets, removing positions in downtrends regardless of their risk-parity weight.
Together, these mechanisms produce a portfolio that is risk-balanced during favorable conditions and progressively de-risked during unfavorable conditions. The result is a return profile with lower volatility than traditional balanced portfolios during calm markets (due to risk parity) and substantially reduced drawdowns during market crises (due to trend filtering). The combination has been validated across decades of data spanning multiple market cycles, economic regimes, and interest rate environments.
Explore Risk Parity Trend — US (RP-US)
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