Some alternative risk premia (ARPs) products are down 21% for the year as pension funds continue to see mixed returns from their diversifying strategies.
ARPs have grown in popularity as asset owners look to replace stock market beta with hedge fund techniques such as long-short in equities and carry in foreign exchange.
But data to the 23 March show great dispersion in how ARPs are coping with extreme market volatility.
The best performers in the universe of more than 30 commercial ARP funds monitored by London-based investment consultancy, MJ Hudson, are up 3%; more than 24% better than the worst performer.
That dispersion is not new: last year the gap between top and bottom was 29% and in 2018 17% for the MJ Hudson universe.
Antti Suhonen, a senior advisor at MJ Hudson, said that some clients would be disappointed but he noted that different ARPs have different targets – some are more defensive than others.
He also noted that even commonly-understood risk premia such as equity value are in reality neither well-defined nor implemented in a common way by practitioners.
Of strategies that have surprised ARPs negatively this year, Suhonen mentioned low volatility in equities and rates carry in fixed income. He picked out equity quality as a strong performer on the upside.
Ominously, he suggested that many real-world alternative premia have never reached the level of performance shown in academic research of hypothetical past returns.
Toby Goodworth, head of risk and diversifying strategies at investment consultancy bfinance, said: “This is very much a time for liquid, diversifying strategies to stand up and be counted.
“We are seeing academic premia – value, carry, momentum – hold up. Short energy/ long bonds has been a star trend-following trade while less liquid niche strategies and some relative value trades e.g. correlation trades are getting punished because they are more complex and employ leverage.”
Geneva-based Lombard Odier Asset Management runs $1.1bn (€985m) in ARPs, with target volatility from 3% to 12% depending on client preference.
Clément Leturgie, product specialist said that its 10% vol strategy was down -1.4% for the year-to-date.
He said top contributors included commodity carry, bonds carry and cross-asset trend and some alternative volatility strategies such as defensive short volatility equity.
Frankfurt-based Quoniam Asset Management’s ARP was down -3.4%, which would still make top-quartile in the MJ Hudson universe.
Quoniam head of multi-asset Markus Ebner said positive contributors had been FX momentum, underweighting developed currencies against the US dollar, and market-neutral equity index momentum.