Asness Explains The Risk Parity Use Of Leverage

Most value investors avoid using leverage in their portfolio, Baupost Group’s Seth Klarman only uses it for the odd real estate deal for example, because it doesn’t just increase the amount of risk in your portfolio but the chances of actually losing capital. But if you have a target rate of return that you need to hit, AQR Capital Management co-founder Cliff Asness argues that adding leverage is a better way to manage your portfolio’s risk than changing asset allocations.

Facing a balanced portfolio with low expected returns

“We do not think leverage is riskless. Run screaming from anyone who believes that,” says Asness. “We simply believe, in moderation, leverage is a better risk to take in pursuit of higher...