A Framework for Risk Premia Investing: Anywhere to Hide?
29 Pages Posted: 22 Mar 2019 Last revised: 5 Sep 2019
Date Written: July 31, 2019
Alternative risk premia (ARP) strategies are traditionally assumed to diversify both equity and bond market risk. We investigate the nature and risk characteristics of commonly known investable ARP strategies using investment bank strategy data. While most of the strategies have low full sample betas to both equity and commodity markets, several strategies exhibit statistically significant positive betas to bond markets. Additionally, characteristics of most ARP strategies change in the tails of equity and bond market distributions. Consequently, we propose a framework for diversified ARP portfolio construction that uses a hierarchical risk allocation process instead of whole sample volatilities and correlations.
Keywords: Factor Investing, Alternative Beta, Smart Beta, Risk Premia, Style Investing, Quantitative Investment Strategies, Portfolio Construction, Asset Allocation, Momentum, Trend, Value, Carry, Volatility, Quality, Low Beta
JEL Classification: G11, G12, G15
Suggested Citation: Suggested Citation