Investors need to be aware of the underlying exposures in alternative risk premia, particularly the equity risk, which can sometimes be hidden.

Speaking on a panel at the Fiduciary Investors Symposium in the Blue Mountains in May, chief strategist of the global multi-asset team at QIC, Neil Williams, said investors needed to figure out the underlying equity exposure in alternative risk premia investments, to learn the sources of returns.

“There are a number of characteristics of ARPs – they usually use a lot of derivatives, they tend to be long-short, typically use a lot of leverage, many of the strategies are systematic in nature and what they’re trying to do is extract factors and get those relatively concentrated in a particular bucket or exposure,”
Williams said.

“You have to assume that most ARPs are going to come with some equity risk. What are you actually giving yourself exposure to? Everyone will tell you there’s not much but what we have to establish is how much is there.”

He said investors asked his firm two things: ‘What’s your beta?’ ‘What strategies are you running?’

“If you look across all your strategies, you should be able to discern what type of latent equity risk you have in these [investments],” Williams said. “These questions should be asked. But an equity manager will give you an estimate of beta and in stressed markets it can change. These are dynamic strategies. There’s normal beta but also a stressed beta. So, it’s very important to understand how much stressed beta you have.”

Co-head of GAM Systematic, Anthony Lawler, talked about the differences between diversification and timing in an investment strategy. He said diversification is easier and encouraged asset owners to realise the benefit of having different return drivers through diversification.

“The reason to diversify is we don’t know what the return will be for different asset classes,” Lawler said. “You shouldn’t diversify simply because of how things bump around month to month. That’s not as valuable as having truly different drivers.

“One of the key things of diversification is to look outside of equity and bonds to add diversification to the core of your portfolio.”

Lawler said timing was more difficult, as it added statistical complexity; however, he said it could work at the extremes and in markets that show strong auto-correlation.

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