Does Alternative Risk Premia Diversify? New Evidence for the Post-Pandemic Era

The Journal of Portfolio Management (Forthcoming)

Posted: 30 May 2023 Last revised: 11 Dec 2023

See all articles by Antti Suhonen

Antti Suhonen

Aalto University School of Business

Kari Vatanen

Veritas Pension Insurance

Date Written: May 25, 2023

Abstract

We examine the risks and diversification properties of multi-asset alternative risk premia (“ARP”) strategies using a novel data set based on investable ARP products. We first show based on a natural experiment that despite differences in scope and methodology, our data is consistent with historical evidence from alternative ARP benchmarks. The strategies fall broadly into offensive and defensive categories based on their equity market risk, but differ in their exposures to the bond market. For several strategies, sensitivities to traditional assets change materially during market drawdowns, especially for bond market exposure. Trend strategies and the commodity cluster appear as the most promising candidates for portfolio diversification as their bond betas generally reduce during bond selloffs. Furthermore, we present novel findings on ARP performance links to real rates and breakeven inflation changes. Our results underscore the need to analyze ARP strategies beyond linear and unconditional correlation measures.

Keywords: Alternative Beta, Alternative Risk Premia, Style Premia, Factor Investing, Investment Strategies, Portfolio Diversification

JEL Classification: G11, G12

Suggested Citation

Suhonen, Antti and Vatanen, Kari, Does Alternative Risk Premia Diversify? New Evidence for the Post-Pandemic Era (May 25, 2023). The Journal of Portfolio Management (Forthcoming), Available at SSRN: https://ssrn.com/abstract=4459574 or http://dx.doi.org/10.2139/ssrn.4459574

Antti Suhonen (Contact Author)

Aalto University School of Business ( email )

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

Kari Vatanen

Veritas Pension Insurance ( email )

Pohjoisesplanadi 35Aa
Helsinki, 00100
Finland
+358405543021 (Phone)

HOME PAGE: http://www.veritas.fi

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