NETHERLANDS - The financial crisis has emphasised the need for investors to become more innovative and creative when seeking risk premium, according to Ronald Wuijster, managing director strategic portfolio management at APG Asset Management.
"Correlation seems to increase in every crisis," said Wuijster. "Most investors had similar investment portfolios, which made them vulnerable to overriding market sentiment factors during the market downturn. This has shown that there is a need for an innovative risk premium, which can be found in exotic or alternative beta investments.
"To us, exotic beta is an alternative risk premium based on complexity, innovation, diversification or volatility."
Wuijster continued: "Being a long-term investor gives us a competitive edge over some other investors, as it enables us more to reap any potential premium in assets with a less transparent market. Therefore, the financial crisis has not affected the weighting of our allocations dramatically, if at all, it has only increased our search for exotic risk premiums."
That said, he admitted that isolating the risk premium is difficult as, in order to do that, investors need to be prepared to do some additional work and structure the deals themselves, given that there are few pre-packaged solutions are offered at the moment and if they are, they are not considered to come at attractive prices.
The fiduciary manager with €173bn in assets under management has been investing in exotic beta since the end of 2006 such as music rights and pharmaceutical royalties but has also looked for investment opportunities in insurance risks, distressed investments, catastrophe risks, currency beta, commodity backwardation and volatility strategies.
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