Written by Ed Peters, partner, First Quadrant.

“Risk parity” is an asset allocation approach based upon risk rather than capital.  In particular it does not add a leverage constraint (all assets must add up to 100%) if an asset is diversifying and can be leveraged.  Typically such leverage is done cheaply in the exchange traded futures markets.  Since the primary cyclical growth asset in a multi-asset portfolio is equities and the most diversifying asset with equities is sovereign bonds, most portfolios that use “risk parity” concepts in a multi-asset framework end up leveraging sovereign bonds to diversify equities since sovereign bonds have roughly a third of the volatility of equities.

Despite the concerns surrounding the US market, there were notable gains in the month in some core EMEA markets, while peripheral government bond yields declined, says Anthony Belcher, director of EMEA Pricing and Reference Data at Interactive Data

In the first of what will be a regular monthly feature, Elena Skurikhina, head of Russia and CIS debt at Cbonds, reviews the previous month’s activity within the Russian bond market.

China divides investors’ opinion like perhaps nowhere else. It is either the biggest, most important investment opportunity of the modern era, or it is a disaster waiting to happen. But, if you’re a bull, rather than access Chinese growth through the stock market, its currency provides an attractive alternative. By Andy Seaman, partner and portfolio manager, Stratton Street Capital.

Although the absolute supply of high-grade collateral should be sufficient to address the increase in collateral demand, this theory is dependent on firms being able to source their inventories in a centralised and efficient manner. Unfortunately, the capital markets are far from perfect and there is genuine concern that there will be mismatch between where the high-grade collateral is held and where it is needed. It should read Saheed Awan, global head of collateral services, Euroclear, looks at some of the solutions on offer. 

While those who only dabble in derivatives may escape the brunt of Dodd-Frank’s more imposing margin rules, others may require new methods for helping to determine what kind of assets to use and when. A job for collateral optimisation? From Boston, Dave Simons reports.