|Systematic Risk Premia Across Asset Classes|
|February 24, 2012|
Page 2 of 9
While equity factor indices have been discussed at length in previous studies, a more general view of risk premia strategies across asset classes has been lacking. In what follows, we focus on risk premia beyond traditional market betas and equity markets. Strategies that seek to capture these "alternative betas" typically employ techniques unavailable to long-only passive investors. These include non-standard and/or dynamic weightings of index constituents, the use of short positions, leverage, and liquid derivatives. The techniques and instruments used vary widely by asset class.
SYSTEMATIC RISK PREMIA STRATEGIES ACROSS ASSET CLASSES
Systematic risk premia strategies exist in all asset classes and across a number of investment styles. These strategies have historically been the domain of hedge funds and other active investors; many classic hedge fund strategies are based, directly or indirectly, on risk premia strategies. Well-known examples include currency funds exploiting FX "carry" (long high-yielding currencies, short low-yielding currencies), equity funds involved in stock merger arbitrage (long target stocks, short acquirer stocks), commodity funds exploiting roll congestion strategies (long deferred contracts, short the front contracts), and volatility funds harvesting the short volatility premium (by selling delta-hedged options). Long-only active bond managers may decide to extend the duration of their portfolios (accessing the term premium in fixed income), credit managers may add high-yield overlays (accessing the credit carry risk premium), and equity managers may increase the weight of value stocks in their portfolios (earning the equity value premium). In Figure 2, we categorise systematic risk systematic premia strategies both by asset class and investment theme.
ii) How can we be sure to span all the available risk premia?
Neither of these questions has straightforward answers. To answer the first we employ both qualitative and quantitative analysis. Risk premia strategies exhibit these characteristics: