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Alternative Market Briefing

Factor alignment is key for successful risk premia strategies

Tuesday, April 11, 2017

Bailey McCann, Opalesque New York:

Risk premia strategies have been very popular with investors in recent years, but the shine may be starting to wear off. The widespread proliferation of risk premia products can make it difficult for investors to sort out what's right for them. According to participants in the Opalesque Zurich Roundtable, in order to succeed at harvesting risk premia, investors need to understand how factors can impact a portfolio.

"In general, you can't just blindly invest into a number of seemingly different single risk premia, but you need to bundle them together in a robust fashion based on a sound fundamental understanding of their behavior and construction," says delegate Gregory Hung, of Zuercher Kantonalbank. According to Hung, it's important for investors to understand how seemingly unrelated factors can become correlated over time. In order to avoid correlation problems, resilient portfolio construction is key.

To better understand risk premia, delegates say, investors will need to develop an intuition about how factors work at certain points in the market cycle. "This is important because what can happen is the equity momentum factor all of a sudden becomes highly correlated with the low beta equity factor, and therefore you need to monitor those developments closely and take appropriate action," Hung adds.

By aligning different factors appropriately, managers like Hung can work around common problems in the market like......................

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