Unlike traditional allocation, there are two aspects of a Risk Parity portfolio that aim to defend against inflation risk and generate real rates of return that are lacking in traditional asset allocation. The first line of defense is through exposure to commodities and TIPS. The target baseline risk allocation to these two asset classes is 20%, which amounts to a significant notional exposure of 40% on average. The second is PanAgora’s proprietary dynamic risk allocation process. Our research has shown that dynamic risk allocation is highly responsive to inflation cycles and provides an additional source of inflation hedging as it becomes necessary.

 

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