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Alternative risk premia weathering Brexit storm well

Tuesday, July 12, 2016
Opalesque Industry Update - Dr Lars Jaeger, head of quantitative research in GAM’s Alternative Investments Solution (AIS) team, comments on how the growing alternative risk premia industry has delivered strong performance in the uncertain Brexit environment – proving once again its strong diversification and market neutral properties.

Against the volatile Brexit backdrop, many alternative risk premia products have performed very well, with gains between 1.5% and 2.5% for June, turning year-to-date performance positive on average across products in the space. The GAM Star Alternative Risk Premia fund, which allocates to a range of alternative risk premia strategies across asset classes, posted a very strong return, up 2.9% for June, and performance continues to be positive in July, up 6.3% year to date (to 8 July 2016 for the USD institutional share class, net of fees). The performance contribution in June was widely spread across the portfolio with all sectors performing positively. The value allocation led gains and delivered 1.47%, followed by momentum (+1.23%) and carry (+0.18%). Strong gains came from short British pound and long Japanese yen positions, long positions in global government bonds as well as spread positions in value and defensive stocks.

Due to their broad diversification properties, portfolios of alternative risk premia have been able to isolate themselves against the turmoil in capital markets this year. Particularly attractive has been investment in low volatility stocks and minimum variance equity portfolios that benefitted from the flight to quality. Given the uncertainty across global equity markets, this performance can be expected to persist. Momentum in the fixed income space has benefited from the same drivers, which led to a compression in yields, while in the currency space, though more challenging to navigate, momentum has also benefited from strong price moves. Credit and volatility strategies remain appealing, with their return outlooks based on a higher average implied volatility and wider credit spreads providing attractive entry points. As we move forward and data points are digested by our trading algorithms, the algorithms will flexibly adjust to changing markets, dynamically switching exposure. This will ensure we remain well positioned to benefit in the current and forthcoming environment.

As monetary policies continue to diverge and different regions find themselves at different points of their economic cycles, the opportunity set will remain strong for alternative risk premia. From a political and macro point of view, uncertainty is set to remain at elevated levels, and contagion from the Brexit surprise can be seen across Europe.

The strong price moves witnessed this year have proven supportive for risk premia exposures and this is reflected in a strong increase in client demand. In an environment of record low to negative bond yields, high uncertainty in stocks, low but volatile credit spreads, investors are more desperate than ever for yielding assets. At the same time they are disenchanted with the promise of alpha from many traditional alternative investments, having been charged high fees for comparably little performance in recent years. They have now woken up to the new promise of alternative risk premia, which has strong academic backing, reasonable fees, and an attractive multi-year track record. This new investment strategy has finally found resonance with investors and the recent performance in struggling stock markets will further build on this.

What is Alternative Risk Premia?

Alternative Risk Premia are strategies that provide excess returns by taking systematic risks on alternative asset classes or indices. The concept has its origin in hedge fund investment but has largely moved away from the traditional high fee, low transparency black box paradigm. Alternative risk premia offer systematic risk-based returns beyond the traditional long only equity and bond duration risk premia in global capital markets. They can be extracted systematically with computer-based trading models using well-known hedge fund investment techniques like short selling, spread trading, the use of derivatives, dynamic trading or leverage. These investment models can be made investable in a transparent, liquid and highly cost efficient format. The team at GAM pioneered the idea of alternative risk premia investing in 2004, and possesses a track record which provides strong support for the validity of the approach. The study of systematic alternative risk premia is by now a well-researched field in the academic world. This theoretical support as well as the proven track record encouraged many of the global market players including all major investment banks and trading houses to enter the market in recent years.

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