---
title: "Hierarchical Equal Risk Contribution"
description: "Hierarchical Equal Risk Contribution groups instruments that move alike and splits capital along the real groups, so each side of a split carries equal risk."
canonical_url: "https://fincanva.com/docs/strategies/hierarchical-equal-risk-contribution"
last_updated: "2026-09-24"
md_url: "https://fincanva.com/docs/strategies/hierarchical-equal-risk-contribution.md"
---

# Hierarchical Equal Risk Contribution

Hierarchical Equal Risk Contribution is an [allocation method](/docs/strategies/allocation-and-allocation-method) that arranges the instruments into a family tree by how alike they move, then splits the capital along the tree's actual branches so that the two sides of every split contribute the same amount of risk. It is a close relative of [Hierarchical Risk Parity](/docs/strategies/hierarchical-risk-parity): the tree is built the same way, but the capital follows the groups the tree really found instead of cutting an ordered list in half. The method picker labels it **"HERC · Equal Risk per Group"** and describes it as "Like HRP, but follows the real groups and gives each the same risk".

**Also seen as:** HERC, equal risk per group

## How does it differ from Hierarchical Risk Parity?

Two things change, and both follow the groups more faithfully.

- **Where the cut falls.** Hierarchical Risk Parity halves a list, so a cut can land in the middle of a real group. Hierarchical Equal Risk Contribution cuts where the tree branches: if 30 instruments split naturally into 22 cyclical stocks and 8 defensive ones, the first split is 22 against 8, not 15 against 15.
- **How each split is shared.** Each side gets a share that makes the two sides' risk contributions equal, which for two sides means sharing in inverse proportion to their volatility:

$$
w_{\text{left}} = \frac{1/\sigma_{\text{left}}}{1/\sigma_{\text{left}} + 1/\sigma_{\text{right}}}
\qquad
w_{\text{right}} = 1 - w_{\text{left}}
$$

where: $\sigma_{\text{left}}$ and $\sigma_{\text{right}}$ are the [volatilities](/docs/analysis/volatility) of the two branches, and $w$ is each branch's share of the capital above it. Because $w \times \sigma$ comes out the same on both sides, each branch supplies an equal slice of the risk — the [Risk Parity](/docs/strategies/risk-parity) idea applied one split at a time.

In universes where the instruments are only loosely correlated, the two methods give similar weights; the difference grows when strong groups exist.

## How does Fincanva handle it?

- Hierarchical Equal Risk Contribution is offered **inside a single strategy only**, across its instruments; a Combined does not offer it.
- It has no settings of its own. It reads the [calculation window](/docs/strategies/calculation-window) (**In-sample**, 12 months by default) and the **Risk estimation** choice — see [Risk estimation](/docs/strategies/risk-estimation).
- Weights are never negative.
- With most risk estimates — including the recommended Ledoit-Wolf · constant correlation — every instrument must have moved in price at some point inside the window: an instrument whose price stayed flat for the whole window, such as a suspended listing, stops the backtest rather than receiving a weight. Two estimates are the exception; [Risk estimation](/docs/strategies/risk-estimation) names them.
- Weights are recomputed at every [rebalance](/docs/backtesting/rebalance) from the window ending on that date.

## Which plan includes Hierarchical Equal Risk Contribution?

Included from Advanced upwards. See [what each plan includes](/docs/account-security/what-each-plan-includes).

## What does it look like in practice?

Take the same four instruments as on the [Hierarchical Risk Parity](/docs/strategies/hierarchical-risk-parity) page: an equity pair with 20% volatility and a bond pair with 10%, each pair made of two funds of equal risk.

- **First split, equities against bonds:** the equity branch receives (1 ÷ 0.20) ÷ (1 ÷ 0.20 + 1 ÷ 0.10) = 5 ÷ 15 = **33.3%**, and the bond branch **66.7%**. Check: 33.3% × 20% = 66.7% × 10% ≈ 6.7% — equal risk on both sides.
- **Second split, inside each pair:** two funds of equal risk share their branch evenly, so each equity fund gets 16.7% and each bond fund 33.3%.

The result is 16.7% / 16.7% / 33.3% / 33.3%. Hierarchical Risk Parity, splitting by variance instead of volatility, gave the same tree 10% / 10% / 40% / 40% — a heavier tilt toward the calmer branch.

Fincanva is for education and illustration only. It is not personalised financial advice, and past or simulated results do not predict future ones. [Read the Terms Addendum](https://fincanva.com/terms/addendum#section-3)