Florence Barjou

Florence Barjou

Deputy Head of Active Investment Strategies

Lyxor Asset Management


Alternative risk premia : a new frontier for multi-asset strategies

26 Mar 2018

Active Strategies

Why is the current macro environment difficult for financial markets?

We have noticed the volatility has made a comeback on financial markets since the start of the year and with the cycle being very mature and many asset classes expensive this is understandable. So, it is unsurprising the investors are looking for flexible and diversified investments strategies; flexible because you have to adapt to changing markets and diversified because you just don’t want to put all your eggs in the basket. But today, traditional asset classes most of them are all expensive and also, they can show an unusual positive correlation so it does become necessary to search diversification but beyond traditional asset classes.
 

What is an alternative risk premia?

Generally speaking, a risk premia is the reward associated to market risks linked to a financial asset. That financial asset can be a traditional asset so obviously: equity, government bond or corporate credit. But that financial asset can also be non-traditional, in that case we are going to talk about alternative risk premia. A way to see alternative risk premia is to explain them as tracking or replicating in a systematic way a fraction of alpha which it is linked to the performance of an alternative invest strategy or if you prefer a hedge fund. So, for an investor it is a way to gain exposure systematically to a non-directional source of performance. An example could be in the fixed income space, a curve premia or in the equity space we can think of the quality premia or the low volatility premia, each hedged for the market risk.
 

Why combine alternative risk premia with traditional assets in diversified portfolios?

What is really new today, is that alternative risk premia can now be easily accessed. They can be accessed in a transparent, liquid and a cost-effecient way mainly to ETFs or bank indices. In fact, when uncertainty is increasing it is a quite addition to the investment universe to be able to invest and to underline which by construction are uncorrelated to the traditional asset classes. And in terms of performance, we think that alternative risk premia can bring an additional source of performance in a market environment where returns on traditional asset classes could progressive become exhausted. So, I think alternative risks premia are much more than just a latest trend and in fact, in our funds at Lyxor we are already invest in such strategies.

Why is the current macro environment difficult for financial markets?

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