The Long and the Short of Risk Parity

I propose an approach to create risk parity portfolios combining multiple long-short strategies defined over a universe of assets. The proposed approach nests as special cases risk parity methods that have been proposed for specific trading strategies such as trend following and pairs trading, but it is more general. I apply the approach empirically to three types of quantitative investment strategies commonly used by practitioners: trend following, pairs trading and factor investing. In all cases, the proposed method achieves the objective of attaining equal risk contributions, while also yielding improvements in terms of risk-adjusted returns and significantly reducing drawdowns. The gains appear to be more relevant, statistically and economically, for trend following and factor investing