Risk Premia Investing Traditional to Alternatives Mercer

Mercer Insights


Risk Premia Investing


RISK PREMIA INVESTING –
FROM THE TRADITIONAL TO ALTERNATIVES — MERCER 


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Alternative risk premia have become a popular area of focus in the investment world. Academic literature has been supplemented with product launches from the asset management community and new solutions from investment banks (some of these are marketed as “smart beta” strategies). Recent surveys of large institutional investors illustrate an attraction to this type of framework, with indications that large endowments and pension plan investors are increasingly focusing on factor analysis and specifically risk premia when constructing their broader investment portfolios.

In this paper we provide an overview of the risk premia concept and focus on a set of liquid “alternative” (or non-traditional) risk premia in particular. We cover the following topics.

  • Identifying traditional risk premia (how risk premia can be defined and the common exposures for investors).
  • The emergence of alternative risk premia (such as value, carry, and momentum) as recognized and exploitable sources of returns.
  • Identifying alternative risk premia (the types of alternative risk premia that are regularly and consistently identified as sources of returns for institutional investors).
  • The possible roles of alternative risk premia (why investors might want to gain exposure).
  • Thoughts on using new alternative risk premia products as standalone components of a growth portfolio.
     

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