A Framework for Risk Premia Investing: Anywhere to Hide?

29 Pages Posted: 22 Mar 2019 Last revised: 5 Sep 2019

See all articles by Kari Vatanen

Kari Vatanen

Varma Mutual Pension Insurance Company

Antti Suhonen

Aalto University School of Business

Date Written: July 31, 2019

Abstract

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

Vatanen, Kari and Suhonen, Antti, A Framework for Risk Premia Investing: Anywhere to Hide? (July 31, 2019). Available at SSRN: https://ssrn.com/abstract=3344586 or http://dx.doi.org/10.2139/ssrn.3344586

Kari Vatanen (Contact Author)

Varma Mutual Pension Insurance Company ( email )

P.O. Box 1
Varma
Helsinki, FI-00098
Finland

Antti Suhonen

Aalto University School of Business ( email )

P.O. Box 21210
AALTO, FI-00076
Finland

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