Alternative Risk Premia and ARP strategies

ARP strategies in equities, fixed income, and currencies

Traditional, long only portfolios will naturally access risk premia through exposures to the equity risk premium and the bond term premium. Alternative Risk Premia strategies seek to harvest other types of risk premia, often utilising both long and short exposures. Wellington Management describes these strategies as falling into four broad categories - trend, carry, convergence, and equity style premia. 

ARP strategies can exist within many asset classes, including equities, fixed income, and currencies. We've selected below a variety of recent papers to showcase different forms of alternative risk premia strategies. There are hundreds of other papers on our site around this theme - simply enter your keywords in the search box above and we'll instantly show you the most popular papers on that topic.

Featured Papers

The Impact of Crowding in Alternative Risk Premia Investing (Financial Analysts Journal, 2019)

Crowding is a big concern for ARP strategies. This paper looks at the performance of convergence premia versus divergence premia during periods of large investor inflows.

A factor-based method to diversify oil exposure (Invesco Risk & Reward 2Q 2019)

(For compliance reasons, this paper is only accessible in Certain Geographies)

Among other things, this 32-page issue of Risk & Reward examines how to take a factor-based approach to diversifying oil exposure. Oil investors, fixed income investors and sovereign wealth funds are the main focus of this issue.

Alternative Risk Premia Strategies

Understanding the role of alternative risk premia (Wellington Management, 2018)

Wellington Management looks at four categories of alternative risk premia that are both persistent and profitable over the long term. They also discuss issues with implementation and portfolio construction.

Overview of Alternative Risk Premia (“ARP”) Strategies - Neuberger Berman, 2018

(For compliance reasons, this paper is only accessible in Certain Geographies)

Neuberger Berman provides a framework for investors who are considering ARP strategies, given their increasing diversity and complexity.

Understanding Alternative Risk Premia (AQR Capital Management, 2018)

Incorporating a market neutral allocation such as an ARP allocation into multi-aset portfolios may have the potential to improve risk-adjusted returns. AQR explains further.

Mixing Risk Parity, Carry and Momentum Risk Premia (Amundi, 2017)

(For compliance reasons, this paper is not accessible in the United States)

Amundi explains why a new approach to diversification within portfolios should include alternative risk premia such as carry and momentum.

Smart Beta Strategies

Estimating Transaction Costs for Smart Beta Strategies (Scientific Beta, 2019)

This paper examines whether increased transaction costs within smart beta strategies meaningfully erode away their alpha, or whether returns vs. a cap-weighted index are robust when inclusive of transaction costs.

Smart Beta Strategies: A Main Driver of ETF Demand (BlackRock, 2019)

(For compliance reasons, this paper is only accessible in the United States)

As a part of its 9th annual US ETF Study, Greenwich Associates interviewed 181 institutional investors on the linkage between the utilisation of smart beta strategies and the demand for ETFs. Around one-third of investors surveyed plan on increasing allocations to factor-based or smart beta ETFs over the next year.

Misconceptions and Mis-selling in Smart Beta (Scientific Beta, 2019)

Implicit risks (whether market-based, macroeconomic, or geographic/sector related) can impact returns of smart beta strategies.

Equity Risk Premia

Global Factor Premiums (Robeco, 2019)

Robeco examines 24 global factor premiums across a variety of asset classes and using over 200 years of data. Focusing on a relatively small number of factors for each asset class, the new evidence shows that the large majority of these key, global factors are strongly present under conservative p-hacking considerations, with limited out-of-sample decay of the return premia.

Factors in Focus: Dynamic short term, strategic long term (MSCI blog, 2019)

MSCI reviews factor performance during Q2 2019, also looking at potential ramifications for Q3.

Forecasting Factor Returns (Two Sigma, May 2019)

In this paper, Two Sigma proposes a methodology using historical data to quantify the return premia for major asset-class based factors.

What Is a Factor? The Impact of the Long-Only Constraint (Axioma, 2019)

A long-only constraint implies that a manager can't short securities within their portfolio, yet these returns are often measured against a factor portfolio that can. This difference could have a substantial impact.

Factor Report (Lazard AM, Aug 2019)

Lazard Asset Management reviews growth, value, sentiment, quality, and risk factor returns across multiple equity markets in a report that's updated on a monthly basis.

Single Smart Factor Indices and Strong Factor Intensity (Scientific Beta, 2019)

The single smart factor indices from Scientific Beta utilise a filter for high factor intensity that also looks at multi-factor interactions for the selected securities.

Bond and Currency Risk Premia

Applying factor investing to corporate bonds (Robeco, 2018)

Robeco showcases the ways that factors like size, value, and momentum can be applied to corporate bond portfolios in order to generate higher risk-adjusted returns.

Bottom-up factor investing in corporate bonds (Fidelity Intl blog, Jun 2019)

(For compliance reasons, this paper is only accessible in the UK & Europe)

Systematic factor investing is tricky to apply to corporate bond portfolios, but Fidelity International presents a bottom-up approach that may be able to generate positive alpha throughout the credit cycle.

Risk factors in currency markets - the top papers (Savvy Investor)

By using our search functionality, you can quickly idenitfy the top papers for any key themes within a topic.

ABOUT THE AUTHOR

Andrew Perrins is a former Actuary and Asset Allocator. After qualifying as an Actuary, he worked for 15 years in investment management, serving as Director of Asset Allocation for Abbey Life and for Chase Manhattan, before setting out on a more entrepreneurial path.

To contact him, email [email protected]