@article {Rudin63, author = {Alexander Rudin and William M. Marr}, title = {Investor Views, Drawdown-Based Risk Parity, and Hedge Fund Portfolio Construction}, volume = {19}, number = {2}, pages = {63--69}, year = {2016}, doi = {10.3905/jai.2016.19.2.063}, publisher = {Institutional Investor Journals Umbrella}, abstract = {Recently, risk parity has become one of the most frequently used portfolio construction frameworks within the institutional investor community. It would probably become even more popular if it didn{\textquoteright}t explicitly disregard investor views on asset valuations, which sometimes leads to risk parity producing counterintuitive results. In this article, the authors reformulate the risk parity approach in a way that allows for incorporating investor views. The key change that they suggest is to switch from volatility as a principal measure of asset risk within the risk parity framework to expected drawdown. As the authors demonstrate, such a change makes incorporating investor views into the risk parity framework possible and intuitive, which, in their opinion, represents a welcome enhancement to an already widely used technique. A range of potential applications in the arena of both traditional and alternative investments is discussed.TOPICS: Real assets/alternative investments/private equity, portfolio construction, VAR and use of alternative risk measures of trading risk}, issn = {1520-3255}, URL = {https://jai.pm-research.com/content/19/2/63}, eprint = {https://jai.pm-research.com/content/19/2/63.full.pdf}, journal = {The Journal of Alternative Investments} }