Essential Beta: Global Growth Through Risk Parity

Past performance is no guarantee of future results. Potential for profi t is accompanied by possibility of loss. Commodities trading involves substantial risk of loss. Introduction Essential Beta (EB) is an investment strategy designed to achieve equity like returns with balanced portfolio volatility and a low correlation to equities. It does so by selecting the liquid markets that are essential for growth over all phases of the business cycle and by marrying this with portfolio construction techniques that target true risk and capital diversification. Investors often confuse capital diversification with risk diversification; however, the latter is not necessarily the same as the former. Many growth-oriented, multi-asset portfolios contain a broad array of assets (capital diversification), but in the end the majority of these assets are tied to cyclical growth and, as a result, are highly correlated. They go up and down together over the business cycle. These efforts at “diversification” simply target volatility reduction, which may result in a portfolio that has lower risk than the primary cyclical growth element, common stocks, but still has a high correlation to that same asset class. Essential Beta, in contrast, has a significant allocation to counter-cyclical assets and thus achieves growth at a lower correlation to equities. It seeks to accomplish this by using a “risk parity” approach and by taking into account the dynamic nature of the business cycle. It uses other tools, such as tail-risk hedging techniques, to further limit downside risk. All assets are long-only and primarily exchange traded.