HRP vs MVO Portfolio Construction

Comparing Hierarchical Risk Parity against Mean-Variance Optimization for cryptocurrency portfolios

Published: February 7, 2026 Recommendation: HRP

75%

HRP Lower Volatility

75%

HRP Better Drawdowns

2.2x

More Consistent Returns

115%

MVO Avg Return

Executive Summary

HRP Advantages

+ Lower volatility (23.9% vs 30.2%) - wins 75% of windows
+ Better drawdown protection (worst: 14.4% vs 16.8%)
+ More consistent returns (std: 31.9% vs 71.4%)
+ No matrix inversion - works with singular covariance

MVO Advantages

+ Higher absolute returns (115.3% vs 80.5% average)
+ Slightly higher Sharpe (3.67 vs 3.10)
+ Can capture outlier gains (231.8% in Window 2)
+ Maximum Sharpe portfolio option available

Performance Metrics Comparison

Insight: MVO shows higher returns but also higher volatility and drawdowns.

HRP Win Rates vs MVO

Key Finding: HRP wins on risk metrics (volatility, drawdown) in 75% of windows.

Returns Across Test Windows

Insight: MVO can capture extreme gains (Window 2: 231.8%) but with more variance.

Volatility Across Test Windows

Key Finding: HRP consistently delivers lower volatility across all windows.

Maximum Drawdown Comparison

Key Finding: HRP's worst drawdown (14.4%) beats MVO's worst (16.8%).

Risk-Return Profile

Insight: HRP clusters in lower-risk region; MVO shows wider spread.

Methodology

HRP Algorithm

Tree Clustering: Ward's hierarchical clustering on correlation distance
Quasi-Diagonalization: Reorder assets so correlated ones are adjacent
Recursive Bisection: Allocate using inverse variance within clusters

MVO Algorithm

Covariance Matrix: Build from correlation and volatilities
Gradient Descent: Minimize portfolio variance
Simplex Projection: Enforce weight constraints (sum=1, non-negative)

Test Configuration

Windows: 4 rolling 6-month periods
Training: 6 months for correlation/weight calculation
Testing: 6 months out-of-sample performance
Assets: Top 20 grid-suitable cryptocurrencies

Rating System Integration

ETS Filter: Only grid-suitable assets (ETS >= 40)
Weight Boost: Higher ETS = allocation boost within clusters
Correlation Aware: HRP handles crypto's high correlation naturally

Implementation Recommendation

Conservative Profiles

Use HRP as default. Provides better risk management and more consistent returns.

Aggressive Profiles

Use MVO for return-focused users willing to accept higher volatility and drawdowns.

Hybrid Approach

Offer both methods in UI. Let users choose based on their risk tolerance and goals.

Related Research

Grid Trading Profitability

Exchange comparison across 480 backtests

^* Note on this figure, added 2026-08-05: The 0.886 correlation (and the return/win-rate figures on this page) were measured under an earlier version of the rating formula (dated 2026-01-29). The formula has since been re-optimized three times; internal walk-forward testing as of 2026-05-13 indicates a higher correlation under the current formula. We are re-running this study under the live formula and will republish updated figures. The qualitative finding — that higher-rated assets have historically outperformed lower-rated ones — is not affected by this note; the exact numbers above should not be cited as describing today's system until the re-run is complete.