Factor Timing Revisited: Alternative Risk Premia Allocation Based on Nowcasting and Valuation Signals

Abstract

Alternative risk premia are encountering growing interest from investors. The vast majority of the academic literature has been focusing on describing the alternative risk premia (typically, momentum, carry and value strategies) individually. In this article, we investigate the question of allocation across a diversified range of cross-asset alternative risk premia over the period 1990-2018. For this, we design an active (macro risk-based) allocation framework that notably aims to exploit alternative risk premia’s varying behavior in different macro regimes and their valuations over time. We perform backtests of the allocation strategy in an out-of-sample setting, shedding light on the significance of both sources of information.

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