Risk Parity Trend — Global (RP-GLOBAL)
Developed by Clare, Seaton, Smith & Thomas · Risk Parity + Trend · Med Risk
The Global variant of Risk Parity Trend extends the framework published by Clare, Seaton, Smith, and Thomas (SSRN #2126478) to a globally diversified asset universe. While the US variant applies inverse-volatility weighting and trend filtering to a US-centric portfolio, RP-GLOBAL broadens the equity component to include global stock markets and emerging markets, providing more comprehensive geographic diversification and additional sources of uncorrelated returns.
The global universe replaces US-specific equity exposure with broader international coverage: global equities (VT), emerging markets (EEM), aggregate bonds (AGG), and commodities (DBC). This expanded geographic scope captures equity momentum across developed and developing markets simultaneously, providing exposure to economic growth cycles that may diverge from the US experience. During periods of US dollar weakness or emerging market outperformance, the global variant benefits from trends that the US-only version would miss entirely.
The risk parity weighting and trend filtering mechanisms operate identically to the US variant. Each asset receives inverse-volatility weighting that equalizes risk contributions, and per-asset ten-month moving average filters independently remove positions that enter downtrends. The combination produces a globally balanced portfolio that is both risk-equalized across its constituent asset classes and protected against sustained bear markets in any individual component.
The global variant tends to produce higher bond allocations than the US variant because global equity indices have historically exhibited higher volatility than US-only indices (due to currency effects and emerging market inclusion), causing the inverse-volatility weighting to allocate more to the lower-volatility bond and commodity positions. This structural tilt toward bonds produces slightly lower returns during equity bull markets but provides additional stability during periods of elevated global uncertainty.
How It Works
Global Universe and Risk Weighting
The portfolio applies inverse-volatility weighting across four asset classes: global equities (VT), emerging market equities (EEM), US aggregate bonds (AGG), and commodities (DBC). Each asset's weight is proportional to the inverse of its trailing realized volatility, calculated from recent daily returns. The broader geographic scope of VT and EEM typically produces higher equity volatilities than SPY alone, resulting in lower equity weights and higher bond weights compared to the US variant.
The inverse-volatility calculation adjusts monthly, automatically adapting to changing market conditions. During periods of elevated equity volatility — such as the COVID crash or the 2022 selloff — the equity weights decrease further while bond weights increase, providing an implicit risk management mechanism that operates independently of the trend filter. Conversely, during calm equity markets, the equity weights increase modestly as their volatility converges toward bond-like levels.
Independent Trend Filtering
Each asset is evaluated against its own ten-month simple moving average. Positions above their moving average maintain their inverse-volatility weight. Positions below are shifted to cash. The filtering operates independently per asset, meaning the portfolio can be partially invested in a combination of positions that varies based on which asset classes are currently in uptrends.
The global equity components — VT and EEM — tend to exhibit different trend characteristics due to their geographic diversity. VT, as a global index weighted heavily toward the US, tends to track major US equity trends with modest international modulation. EEM, as a more volatile emerging market index, may enter and exit downtrends at different times than developed markets. This asynchronous behavior means the portfolio's equity exposure can adjust in stages as different geographic regions enter or exit downtrends, providing more granular risk adjustment than a single-equity-index approach.
Global Diversification Benefits
The inclusion of global equities and emerging markets provides diversification benefits that the US-only variant cannot capture. US and international equity markets exhibit alternating multi-year leadership cycles, and emerging markets can decouple from developed markets during commodity booms, currency crises, or regional growth spurts. By including these additional return streams within the risk-parity framework, the global variant captures a broader set of economic drivers while maintaining the risk-equalized allocation that prevents any single source of returns from dominating the portfolio's risk profile.
The trade-off for broader diversification is higher complexity in the trend filtering component. With more equity positions covering different geographic cycles, the portfolio may experience more frequent partial defensive positioning — one equity component in cash while another remains invested. This can produce a more continuously variable risk profile compared to the US variant's simpler binary adjustments.
Explore Risk Parity Trend — Global (RP-GLOBAL)
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