Can Alpha Be Captured by Risk Premia?
Posted: 21 May 2019
Date Written: May 30, 2013
This paper explores the roles of risk premia strategies in the institutional portfolios — not only as potential replacements for existing passive beta investments but for certain active mandates as well. Specifically, we quantify the degree to which active manager returns (alpha) can be captured by using long-only factor portfolios as reflected by the MSCI Risk Premia Indices. Using 10 years of historical data from January 2002 to March 2012, we find that risk premia can account for a substantial portion of alpha, as much as 80%. In addition, we propose a portfolio construction framework for incorporating active managers who deliver the highest alpha, once risk premia have been accounted for.
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