How to Combine Alternative Strategies

Risk parity versus equal-weight

July 2025. Reading Time: 10 Minutes. Author: Nicolas Rabener.

SUMMARY

  • Equal-weighting and risk parity are both reasonable weighting methodologies for alternatives
  • This analysis does not show a clearly superior method
  • Equal-weighting may be more robust out-of-sample

INTRODUCTION

Since 2017, we’ve published dozens of research articles on alternative investment strategies and found that most fail to deliver meaningful value to investors. Many simply represent diluted equity exposure, others are just money pits. A prime example is long-short equity, where the return profile of most funds can be closely replicated within seconds by combining allocations to the S&P 500 and cash (read Are Liquid Alts more than Diluted Equity Funds? and Myth Busting: Alts’ Uncorrelated Returns Diversify Portfolios).

That said, there are exceptions – strategies that have historically offered genuine diversification benefits. Examples include BlackRock’s Global Equity Market Neutral Fund (BDMIX) and AQR’s Managed Futures Strategy Fund (AQMIX). Of course, there’s always the risk that these strategies may underperform going forward; by nature, we’re analyzing the survivors.

Identifying a shortlist of promising alternative funds is only the first step. The next is determining the appropriate overall allocation to alternatives, followed by decisions on how to weight the funds within that bucket. In this research article, we focus on the two most robust weighting methodologies: equal-weighting and risk parity.

CORRELATION ANALYSIS

While there are thousands of alternative investment products, most can be grouped into a dozen or so core strategy types. For this analysis, we selected five funds across four strategies that historically exhibit low correlations to both equities and bonds: managed futures (AQMIX), market neutral (VMNIX and BDMIX), arbitrage (ADAIX), and global macro (EGRIX). We also include a tail risk strategy (BTAL) and gold for additional diversification.

Correlation analysis with the S&P 5