Making sense of Alternative Risk Premia

In the 1960s Harry Markowitz and William Sharpe devised the 60-40 portfolio as the answer to achieving diversification and maximising risk adjusted returns. 60 years later and that simple 60-40 split forms the bedrock of many client's portfolios. The success of which hinges on the assumption that the traditional risk premia of being long equities and long bonds remains negatively correlated.  However, since the Global Financial Crisis (GFC), an increasing number of investors have sought to further diversify by turning to 'alternative risk premia on real assets.' The past few years, however, have demonstrated that real estate, private equity, and infrastructure are often subject to the same risk premia as equities and bonds. Infrastructure, long considered a reliable alternative income source, ultimately revealed itself as a mere proxy for duration, suffering the same cruel fate that has befallen bonds.  

'Alternative Risk Premia on financial assets'—once the exclusive domain of hedge funds and proprietary trading desks—have now increasingly entered the mainstream. These represent systematic sources of return, typically harvested using long/short strategies that are either uncorrelated or negatively correlated with traditional assets. Although these strategies may carry some negative connotations among UK investors, they are simply an extension of the factor investing approach commonly applied to equities, such as overweighting undervalued assets and underweighting overvalued ones.

We invite you to join us for a light lunch on Tuesday, 8 October, from 12:00 PM to 2:00 PM where Portfolio Manager Tom Boyle will demystify the alternative risk premia universe and explore how these strategies might enhance your clients' multi-asset portfolios.