Portfolio optimization for institutional investors: Risk parity and long-term objectives
Published:
May 16, 2026
Volume:
24
Keywords:
Risk parity
Institutional investors
Portfolio optimization
HRP
CVaR
Risk management
Abstract
This study investigates the integration of risk parity models with the long-term objectives of institutional investors, comparing them with traditional portfolio allocation approaches over 2000-2024. We evaluate seven strategies: 60/40, minimum variance, equal weighting, maximum Sharpe, traditional risk parity, Hierarchical Risk Parity (HRP), and CVaR-based risk parity. The results indicate that HRP and CVaR-based risk parity offer stronger risk-return profiles, with lower drawdowns and greater resilience in stressed markets. A moderate allocation to illiquid assets improves returns and risk-adjusted performance metrics. The study suggests that pension funds, insurance companies, endowments, and family offices can benefit from advanced risk parity models as a core portfolio approach, dynamically adapting to market conditions.
How to cite
Luís Eduardo Nunes, André Luís da Silva Leite. Portfolio optimization for institutional investors: Risk parity and long-term objectives. Brazilian Review of Finance, v. 24, n. 1, 2026. p. e202608. DOI: 10.12660/rbfin.v24n1.2026.97825.
References
Ang, A., Papanikolaou, D. & Westerfield, M. M. (2014). Portfolio choice with illiquid assets. Management Science, 60(11), 2737-2761. https://doi.org/10.1287/mnsc.2014.1986
Bacen (2025). Relatório de estabilidade financeira. v. 24 n. 2, Banco Central do Brasil, Brasília, DF. https://www.bcb.gov.br/content/publicacoes/ref/202510/RELESTAB202510-refPub.pdf
Deković, D. & Šimović, P. P. (2025). Hierarchical risk parity: Efficient implementation and real world analysis. Future Generation Computer Systems, 167, 107744. https://doi.org/10.1016/j.future.2025.107744
Diseko, N. V., Bonga-Bonga, L. & Manguzvane, M. M. (2015). Dynamic portfolio rebalancing with safe-haven assets. MPRA Paper 123408, Munich Personal RePEc Archive. Posted 22 Jan. 2025. https://mpra.ub.uni-muenchen.de/123408/
Gubu, L. & Hilmi, M. R. (2024). Beyond mean-variance Markowitz portfolio selection: A comparison of mean-variance-skewness-kurtosis model and robust mean-variance model. Economic Computation and Economic Cybernetics Studies and Research, 58(1/2024), 298-313. https://doi.org/10.24818/18423264/58.1.24.19
Krokhmal, P., Palmquist, J. & Uryasev, S. (2002). Portfolio optimization with conditional value-at-risk objective and constraints. Journal of Risk, 4(2), 43-68. https://doi.org/10.21314/JOR.2002.057
Ledoit, O. & Wolf, M. (2012). Nonlinear shrinkage estimation of large-dimensional covariance matrices. The Annals of Statistics, 40(2), 1024-1060. https://doi.org/10.1214/12-AOS989
Lee, J., Jeon, H., Bae, H. & Lee, Y. (2025). Return prediction for mean-variance portfolio selection: How decision-focused learning shapes forecasting models. Proceedings of the 6th ACM International Conference on AI in Finance, ICAIF '25, Association for Computing Machinery, New York, NY, USA, p. 114-122. https://doi.org/10.1145/3768292.3770423
López de Prado, M. (2016). Building diversified portfolios that outperform out of sample. The Journal of Portfolio Management, 42(4), 59-69. https://doi.org/10.3905/jpm.2016.42.4.059
Nguyen, M. D. (2025). Advanced investing with deep learning for risk-aligned portfolio optimization. PLoS One, 20(8), e0330547. https://doi.org/10.1371/journal.pone.0330547
Palit, D. & Prybutok, V. R. (2024). A study of Hierarchical Risk Parity in portfolio construction. Journal of Economic Analysis, 3(3), 37-48. https://doi.org/10.58567/jea03030006
Prihatiningsih, P., Early, Q. R. & Rois, M. (2025). Portfolio optimization: A comparative analysis a single index and Markowitz model. Journal of Finance and Business Digital, 4(1), 259-278. https://doi.org/10.55927/jfbd.v4i1.73
Qureshi, F., Qureshi, S., Ismail, I. & Yarovaya, L. (2025). Unlocking economic insights: ESG integration, market dynamics and sustainable transitions. Energy Economics, 145, 108407. https://doi.org/10.1016/j.eneco.2025.108407
Rudin, A. & Marr, W. M. (2016). Investor views, drawdown-based risk parity, and hedge fund portfolio construction. The Journal of Alternative Investments, 19(2), 63-69. https://doi.org/10.3905/jai.2016.19.2.063
Silva, L. P. d., Alem, D. & Carvalho, F. L. d. (2017). Portfolio optimization using mean absolute deviation (MAD) and conditional value-at-risk (CVaR). Production, 27, e20162088. https://doi.org/10.1590/0103-6513.208816
Sullivan, R. N. & Wey, M. (2025). Risk parity and its discontents. Working Paper 5165202, Darden Business School. https://doi.org/10.2139/ssrn.5165202
Swensen, D. F. (2009). Pioneering portfolio management: An unconventional approach to institutional investment, fully revised and updated. Simon and Schuster, New York. https://www.simonandschuster.com/books/Pioneering-Portfolio-Management/David-F-Swensen/9781416544692