Abstract
In the past decade, the relationship between traditional asset classes got distorted by crises, a low-interest rate environment and global central bank policies. Asset classes became more correlated, posing challenges in finding liquid and diversified strategies. Alternative Risk Premia (ARP) can assist in providing uncorrelated sources of returns to traditional asset classes and general markets. It is an extension of traditional factor-based investing, and historically it has served as a foundation to the hedge fund community across multi-asset and systematic strategies such as the carry trade and trend following. This chapter provides an insight into the theory and practicality behind ARP strategies. The focus is narrowed to the segments of ARP strategies that have academic roots and allow for a rules-based implementation in portfolios. There are no universal rules that govern the ARP world. However, it provides an opportunity to systematically harvest returns of hedge fund investment styles in an effective, diversified and transparent way.
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Notes
- 1.
Based on a survey of 200 institutional investors by The Economist Intelligence Unit on behalf of BlackRock in January 2016.
- 2.
Arguably, there are plenty of ARP strategies (e.g. in equities) that are “alternative” simply by taking a traditional style premia and implementing it in a market neutral way.
- 3.
“15th Annual Alternative Investment Survey,” Deutsche Bank (March 2017).
- 4.
“Manager Intelligence and Market Trends,” bFinance (February 2017).
- 5.
“Recent Hedge Fund Trends,” Morgan Stanley Prime Brokerage-Strategic Content Group (July 2017).
- 6.
For a more insight into ARP strategies and technical treatment, see Hamdan et al. from 2016.
- 7.
There are several variations of the purchasing power parity including the Big Mac index instead of a basket of goods the Big Mac index compares the price of a Big Mac from country to country as an indicator of the level of cost per country. If the Big Mac costs more in a country theoretically the prices and then in turn the currencies are overpriced and the currencies should drop in value over time. If the price of a Big Mac cost less in a country theoretically the prices and in turn the currency is undervalued and the currency should rise in value over time. It is interesting to note that when comparing the Big Mac index to the actual purchasing price parity chart they are strikingly similar. Like all economic theories, the purchasing power parity has its problems.
- 8.
Barclays Rates Momentum Factor Index use the average of the past 6-month, 12-month and 18-month futures return.
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Zaher, F. (2019). Multi-Asset: Alternative Risk Premia. In: Index Fund Management. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-19400-0_11
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DOI: https://doi.org/10.1007/978-3-030-19400-0_11
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