Why we think combining Alternative Risk Premia is necessary in today’s economic environment, and how to go about it.
Risk premia strategies (such as Trend, Carry, Volatility and Value) have faced various headwinds since the 2008 financial crisis. Key drivers of the decline in the levels of premia include historically low interest rates, greater levels of unpredictability in asset volatility and the increased tendency of assets to move together. However, the ability of a well‐constructed strategy to extract a given level of premia has stayed broadly constant, and correlations between the risk premia types remain low. This latter attribute allows investors to combine the risk premia into one allocation to take advantage of the diversification between them, coupled with additional advantages of increased exposure (compared to separate allocations to each individual premium) with reduced trading costs coming from netting benefits.