I'm working with a heterogenous basket of instruments (in volatility terms). Risk parity allocation seems to be useful for the portfolio( * 1/Volatility).
However, there are times when the volatility of a couple of instruments drops down significantly compared to the rest of the universe. Risk parity asset allocation shifts too much capital to the low-vol instruments(20-50%) which is highly undesirable.
Basic improvement to the allocation approach introducing a cutoff rule based on comparing the risk parity allocation to a naive equal weight approach and limiting the allocation to a maximum percentage(10-20%). However, this doesn't seem to be optimal especially when universe size becomes too small or too large.
Any ideas/improvements/suggestions on how to deal with risk allocation in heterogenous universes while actively avoiding concentrating the portfolio weights to a few instruments?