---
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/glossary/hierarchical-equal-risk-contribution"
last_updated: "2026-10-06"
md_url: "https://fincanva.com/glossary/hierarchical-equal-risk-contribution.md"
---

# Hierarchical equal risk contribution

Hierarchical equal risk contribution is an [allocation method](/glossary/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 both sides of every split contribute the same risk. It builds the tree like [Hierarchical risk parity](/glossary/hierarchical-risk-parity), but follows the groups found instead of halving an ordered list.

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

## How does Fincanva handle it?

The method picker labels it **"HERC · Hierarchical equal risk contribution"** and describes it as "Like HRP, but follows the real groups and gives each the same risk".

- Hierarchical equal risk contribution is offered **inside a single strategy only**, across its instruments; a [Combined](/glossary/combined) does not offer it.
- It has no settings of its own. It reads the [calculation window](/glossary/calculation-window) (**In-sample**, 12 months by default) and the **Covariance matrix** choice — see [covariance matrix](/glossary/covariance-matrix).
- Weights are never negative.
- With most covariance estimators — including the recommended Ledoit-Wolf · constant correlation — every [instrument](/glossary/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](/glossary/backtest) rather than receiving a weight. Two estimators are the exception; [covariance matrix](/glossary/covariance-matrix) names them.
- Weights are recomputed at every [rebalance](/glossary/rebalance) from the window ending on that date.

## 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:

- the left branch's share of the capital above it
- the left branch's volatility
- the right branch's volatility

Each branch is weighted by the inverse of its [volatility](/glossary/volatility). Because $w \times \sigma$ comes out the same on both sides, each branch supplies an equal slice of the risk — the [Risk parity](/glossary/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.

## 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](/glossary/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)