The SGI US Risk Parity Momentum 2014 Index (the Index) is a systematic multi-asset strategy that aims to generate a stable positive performance over the long term through asset diversification and dynamic risk management.
In addition to a volatility target mechanism, the Index relies on a basket of 3 main performance drivers: Diversified Asset Allocation, Risk Budgeting, and Tactical Trend Following. The Index construction begins with a multi-asset allocation consisting of 14 ETFs with exposure to 6 different asset classes. To potentially provide further diversification, improved performance, and mitigate drawdowns, the Equal Risk Contribution (ERC) methodology is employed, which aims to distribute risk (measured by volatility) equally among each ETF. In order to potentially improve the ERC allocation, a Tactical Trend Following Strategy is also applied. The Tactical Trend Following Strategy examines past performance and seeks to identify the best potential allocation among assets. Potential trends are detected using systematic analysis of each basket component. Underlying weights are then adjusted based on the trend analysis.
If the historical volatility is greater (or less) than 6% the Index decreases (or increases) its exposure to the ERC-Momentum allocation in order to maintain the volatility of the Index as close to 6% as possible.