Surprise: These funds are back as big winners

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A short history on risk parity

Surprise, surprise: Low-key investment funds that diversify their portfolios across asset classes to protect them for the long term are again proving their value.

So-called "risk parity" funds—run by prominent investment firms like Bridgewater Associates, AQR Capital Management and Invesco—are up an average of 3.3 percent through March, according to data from Morningstar, easily beating returns for stocks and bonds. That also is better than a classic 60-40 percent stock-bond allocation, which gained 1.87 percent in the first quarter.

Risk parity is a strategy that holds steady investments in stocks, bonds and commodities that in theory will make money in any economic environment, including inflation or deflation, in cases of either high or low growth. Bonds in the portfolio are often modestly levered to increase their return, which can help make up for equity market losses. The basic diversification idea is a time-honored one: You can't predict the market, but you can predict what assets will do well in different environments.

Bridgewater founder Ray Dalio pioneered the idea to manage his fortune, and his firm launched its risk parity fund for external investors in 1996. Most other funds were created following the financial crisis.

The problem is that investors are getting out of the funds following average losses of 0.01 percent in 2013—and worse at several major firms. Morningstar estimates that $1.45 billion of investor capital has been pulled from risk parity funds in 2014, bringing capital in the previously fast-growing strategy to $11 billion as of March 31.