The mutual-fund industry is forever trying to build a better mousetrap — with mixed results.
Index funds were once a novelty, but such pioneers as Vanguard 500 brought about a new standard for low costs, tax efficiency and solid performance. Target-date funds, too, were once the next big thing.
The latest contender is known as risk-parity funds. Just four years after their debut, the new breed of funds has already attracted nearly $30 billion in assets — $16 billion of that in the past year alone, according to Lipper.
Risk-parity funds are designed to navigate changing economic conditions and produce strong risk-adjusted returns. Risk-adjusted returns help to reveal whether a fund’s performance is due to good investment decisions or to taking on undue risk.
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Funds such as the AQR Risk Parity fund (AQRIX) and Invesco’s Balanced-Risk Allocation fund (ABRYX) have better risk-adjusted returns than their peers, according to a metric known as the Sharpe ratio.
So far this year they have gained 6.7 percent and 3.4 percent respectively, compared with the 16 percent return of the Standard & Poor’s 500 index.
But risk-parity funds aren’t designed to capture all of a market rally; that’s the tradeoff for potentially being safer without worrying about losing their shirt.