Alternative Risk Premia Timing: A Point-in-Time Macro, Sentiment, Valuation Analysis

Abstract

We investigate the question of dynamic allocation across a diversified range of alternative risk premia. By using a set of point-in-time indicators across macro, sentiment and valuation dimensions, we find that a majority of indicators deliver a positive information ratio for a majority of alternative risk premia over the period 2005-2020. In our empirical simulations, the macro dimension seems to have worked well, notably during recession periods. Sentiment (based on market stress and momentum) struggled during recovery periods, but added value elsewhere. Valuation has worked well from 2005 to 2013 and lost part of its appeal since then. The combination of indicators allows to deliver a higher information ratio thanks to the low correlation among them. Our research also finds that point-in-time macroeconomic variables (“nowcasters”) can add value over traditional indicators, while this improvement is not significant in the case of the market stress indicator.

Forthcoming in Journal of Systematic Investing.

Keywords: Alternative Risk Premia, Carry, Trend-Following, Momentum, Equity Factors, Risk-Based Investing, Macro Regimes, Asset Allocation

JEL Classification: G11, G17