Risk Budgeting Across a Multi-Strategy Systematic Portfolio
Equal-capital allocation and equal-risk allocation are structurally distinct exercises, and that distinction is where most portfolios quietly go wrong.
The Divergence Between Capital and Risk Allocation
An equal-capital allocation across a set of systematic strategies conveys balance, but strategies with different volatility profiles contribute very differently to total portfolio risk under equal capital weighting. A single high-volatility strategy can dominate portfolio risk while representing an unremarkable share of allocated capital.
“A single high-volatility strategy can dominate portfolio risk while representing an unremarkable share of allocated capital.”
What a Risk Budget Actually Constrains
A genuine risk budget starts from the opposite direction: defining how much total portfolio volatility or drawdown risk the institution is willing to accept, then sizing each strategy's capital allocation so its risk contribution directly matches its intended share of the budget. This produces capital weights that appear uneven and are, in fact, the balanced outcome.
Rebalancing Against Realized Risk
The budget holds only when rebalanced against realized volatility, on a defined, standing schedule. Strategies that have become quieter or more volatile than their historical profile will otherwise drift outside their intended risk contribution well before anyone notices.
- Size capital allocations directly by intended risk contribution
- Define an explicit portfolio-level volatility or drawdown budget ahead of allocating to individual strategies
- Rebalance against realized volatility on a fixed schedule
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