Can Alpha Be Captured by Risk Premia?

Posted: 21 May 2019

Date Written: May 30, 2013

Abstract

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.

Suggested Citation

Bender, Jennifer and Hammond, Paul Brett and Mok, William, Can Alpha Be Captured by Risk Premia? (May 30, 2013). https://doi.org/10.3905/jpm.2014.40.2.018. Available at SSRN: https://ssrn.com/abstract=2543987 or http://dx.doi.org/10.2139/ssrn.2543987

Jennifer Bender (Contact Author)

State Street Global Advisors ( email )

1 Lincoln Street
28th Floor
Boston, MA 02111
United States

Paul Brett Hammond

Capital Group ( email )

333 S. Hope Street, 53rd Floor
Los Angeles, CA 90071
United States

William Mok

MSCI Inc. ( email )

88 Pine Street
2nd Floor
New York, NY 10005
United States

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