The EQ Derivatives survey finds that alternative risk premia strategies have been adopted by innovative pension funds around the globe since the Global Financial Crisis, with assets invested in the strategies now poised to grow 35 per cent by 2019 to USD67 billion.
Investors — including pension funds, life insurance companies, family offices and private banks — are turning to alternative risk premia due to the diversification benefits, lower fees versus hedge funds and positive performance, according to the firm.
“The 2008 Global Financial Crisis laid bare risks in investments that had seemed diversified. Alternative risk premia have emerged as a growth strategy because they are driven by diversification and quantitative strategies,” says Patrick Fay, Head of Research & Consulting at EQDerivatives.
“Alt risk premia are also being fuelled by pressure on asset management fees. Pension funds don’t want to pay hedge funds the large fees they historically demanded.” Fay notes.
In the paper, entitled The Future of Alternative Risk Premia, EQDerivatives gathered the views of investors and fund managers from North America, Europe and Asia Pacific either active or preparing to allocate to alternative risk premia funds or systematic strategies.
The growth in the asset class is being driven by institutional investors coming to realise that many alternative risk premia strategies improve risk-adjusted returns due to their attractive diversification properties, the paper says. The research found that diversification was the main driver for turning to alternative risk premia among institutional investors, followed by a desire to produce uncorrelated returns.
Over the last 12 months, AQR, Goldman Sachs Asset Management, Man Group, JP Morgan Asset Management, GAM and BlackRock, among others, have seen growth in allocations to their alternative risk premia offerings from global investors. Alternative risk premia systematic strategies offered by banks are also finding traction from investors active in the market, as well as from new entrants on the cusp of allocating to the asset class.
Other key findings of the report, include the fact that the research provides a clear definition of alternative risk premia vs. smart beta. Those investors and managers make clear that smart beta are passive long-only strategies whereas ARP is systematic and quantitative, supported by deep academic or practitioner research. ARP solutions are dynamic, multi-asset, long/short strategies that are not necessarily market neutral.
For those investors not yet active in alternative risk premia but looking to allocate to the space over the next 12 months, the average initial investment expected is USD124 million or 8.4 per cent of their portfolio.
The research finds that overcrowding in equities will likely not arrive in the next eighteen months. The firm also forecasts increased demand over the next eighteen months for value, momentum and carry in FX and commodities, as well as market imbalance in commodities.
Goldman Sachs was ranked as the leading bank across alternative risk premia solutions and research, in particular for the breadth of its offering across premia and asset classes and its strength in delivering customised solutions. AQR clearly leads among fund managers, the survey reveals, in particular driven by its contribution to education and academia that underpins alternative risk premia.
To foster further growth, alternative risk premia market participants across the board are demanding that benchmarks be created across different premia. There is a strong need for independent yardsticks by which to judge alternative risk premia solutions.
