Cross-Asset Style Premia Asset Allocation Process

Abstract

We aim to compare different allocation models to build a portfolio that includes a popular set of alternative risk premia, common to most traditional asset classes. Firstly, we review alternative risk premia, mainly Carry, Value and Momentum, then we create sub-styles and styles portfolios. On each asset class we try to compare in a unified framework different style's definitions, to assess how each choice affects the outcome. Finally we aggregate styles in a composite portfolio. All these steps require several decisions on whether and which risk targeting method to utilize and which allocation model to adopt. We show the main differences and consequences of each decision and how they may affect the final portfolio. Lastly, we cluster different solutions according to a dissimilarity criteria, determining which are the key steps that make strategies actually different from one another.

Keywords: Alternative Risk Premia, Style Premia, Carry, Value, Momentum, Trend Following, Risk Targeting, Asset Allocation, Hierarchical Clustering

JEL Classification: G11, G12, G15