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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.

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.