Alternative risk premia: Building blocks for resilient portfolios

Alternative risk premia offer the potential for attractive and durable returns driven by economic motivations, and/or behavioral sources, and they can be harvested through quantitative, rules-based, long-short investment strategies to provide diversifying returns compared to traditional asset classes.

KEY TAKEAWAYS

• Alternative Risk Premia (ARP) offer the potential for attractive and durable returns driven by economic motivations such as compensation for structural risk and/or behavioral sources, and they can be harvested through quantitative, rules-based investment strategies.
• ARP investment strategies typically use liquid securities to provide valuable diversifying returns that differ from conventional, long-only exposures to traditional asset classes. They are implemented via long-short investment techniques, often with the ability to use derivatives and leverage.
• Academic research has demonstrated that hedge funds make use of ARP styles either directly or indirectly.1,2 The emergence of dedicated ARP strategies has thus created efficient access to risk premia that were historically harnessed in often higher fee products of specialized hedge funds.
• These dedicated ARP strategies offer transparency, liquidity, cost efficiency, and scalability—they can be combined to create liquid alternative solutions to address a variety of desired investor objectives, such as diversification of equity risk, a marketneutral return profile, a more return-seeking exposure, or risk mitigation, to name a few examples.
• While the origins and motivations of ARP strategies may be clear, we believe combining an objective-driven portfolio design process with proactive portfolio management is the key to successfully achieving desired outcomes. 

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