Focus

Alternative Risk Premia: A Closer Look

 

This page includes sophisticated financial research and educational information that is intended only for investment professionals and other knowledgeable institutional investors who are capable of evaluating investment risks and making their own investment decisions. It should not be interpreted as investment advice or as a recommendation of any particular security, strategy or investment product.

 

Alternative Investing, Simplified

Investors are bombarded by a slew of new strategies from an increasingly complex financial industry. We think alternative risk premia can simplify this landscape dramatically and may help investors build better alternative portfolios.

Alternative risk premia take inspiration from two places: the hedge fund industry and academia. The first case focuses on well-known, well-studied strategies such as event-driven and convertible arbitrage strategies, from a wide range of hedge funds, strategies that we find can deliver long-run positive returns and that aren’t unique to any one hedge fund manager. Because these return sources don’t rely on any idiosyncratic view of a specific manager, they can be a more transparent alternative to an often opaque asset class, providing investors better visibility into the sources of risk and return in their hedge fund portfolio.

Another class of alternative risk premia comes from decades of academic and practitioner research and is often known as factors or investment “styles,” such as carry investing and long/short value investing. Here, too, we are able to categorize a multitude of historically successful investment strategies into a handful of basic building blocks, potentially providing investors a much more transparent and systematic source of truly alternative returns.

 

alpha to beta

Source: AQR

Characteristics of Alternative Risk Premia

 

We impose a high bar for alternative risk premia. They must have delivered attractive, risk-adjusted returns across multiple markets and decades. They must have low correlations to traditional asset classes. They should be implementable using very liquid securities. And finally, they have intuitive economic explanations for why they work. 


Why such a high bar? In short, we believe these criteria make it more likely that the returns from alternative risk premia are sustainable—sustainable from a manager’s perspective, in the sense that day-to-day risk management is easier with very liquid securities than with illiquid ones, all else being equal. And also sustainable for investors because we believe that strategies that satisfy these criteria are more likely to have excess returns over the long term. 

Focus

Alternative Risk Premia: Introduction

In this quick video primer, we cover the basics—the evolution of these premia, their diversifying effects and why they may represent a better core allocation for alternative portfolios.

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Journal Article

An Alternative Future: Part I

Depending on whom you ask, hedge funds are either the wave of the future or a dangerous fad that has been grossly overcapitalized, and all will end in ruin.

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Journal Article

An Alternative Future: Part II

In Part 1 of "An Alternative Future," I articulated a vision of hedge funds plus traditional index funds replacing traditional active management as the investing model of the future.

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Journal Article

Do Hedge Funds Hedge?

Intentionally or unintentionally, hedge funds appear to price their securities at a lag, we found in a cursory examination of monthly returns from 1994-2000.

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Perspective

Hedge Funds: The (Somewhat Tepid) Defense

Some pension plans’ recently deciding to eliminate their hedge fund programs led us to review some of AQR’s long-standing comments on the industry—that they should be more fully hedged, more transparent, and delivered at a lower fee.

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White Paper

Is Alpha Just Beta Waiting to Be Discovered?

We believe the rise of hedge fund betas will lead not only to the reclassification of alpha but may lead to better diversified portfolios with improved risk control and, therefore, better potential to achieve long-term return targets.

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Journal Article

Investing with Style

Investors are bombarded with a variety of investment strategies and alternatives from an ever-growing and increasingly complex financial industry, each claiming to improve returns and reduce risk.

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Journal Article

Demystifying Managed Futures

Commodity trading advisors (CTAs) managed approximately $320 billion as of the end of the first quarter of 2012, running “managed futures” funds that invest long or short in futures contracts on a variety of commodities, such as metals, grains, cotton and other physical goods, as well as futures and forwards on equity indices, Treasury bonds and currencies.

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Bibliography

Trend Following

Here is a selected list of books, journal articles and working papers that we found helpful in developing our research around Trend Following strategies.

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