Oils ain’t oils: not all risk-premia strategies have struggled

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The last 12-18 months have been difficult for a lot of risk premia strategies. February 2018, in particular, was a shocker. But a recent conference has stoked a fire under the subject. Not all risk premia strategies are the same.

Following a conference at the Blue Mountains west of Sydney, held by Conexus Financial in late May, one of the earliest proponents of risk premia strategies, GAM Investments’ Lars Jaeger, has produced a client note which highlights the differences between the managers in the risk premia space. His short paper is worth reading by anyone considering a quant-style alternative beta strategy or fund.

There were four panellists at the conference session, called ‘Liquid alts, CTAs and risk premia: what went wrong?’ They included: one asset owner, Debbie Alliston from AMP; and three managers: Steve Shepherd from CFM; Neil Williams from QIC; and, Felicity Walsh from Franklin Templeton.

Observers said that Alliston was comfortable with the overall performance of her three risk premia managers over the past year, but the other panel managers were more downbeat as the audience asked some searching questions.

The fact is that none of the major managers offering a risk premia strategy did well over 2018 or the first half of this year. But some, such as GAM’s Lars Jaeger, head of alternative risk premia at GAM Systematic, managed to keep their heads above water, with no significant drawdowns. GAM’s returns were mainly flat while some others lost up to 20 per cent.

Jaeger, a scientist by background and a prolific writer, says in his note that investors should expect every investment strategy to face challenges from time to time. No risk, no return. He says that 2018 showed that risk premia investing is not yet a commoditised style. The managers that outperformed their peers tended to be more balanced, diversified and with a bottom-up fundamental process. They also tended to be more experienced – such as he is – having gone through the last big value/growth shift in the quant meltdown of 2007.

In terms of portfolio construction, the managers which use a classic risk-parity process tend to be overweight lower volatility strategies with a longer tail, which hurt them in sudden dislocations, as happened in February 2018. According to Will Morgan, the general manager of Shed Enterprises, the Australasian representative for GAM, the strategy run by Lars Jaeger since 2004, has a portfolio construction that, “aims to mitigate severe drawdowns such as these, while remaining exposed to the specific risk premia.

Morgan says: “While February 2018 was quite a specific event in the equity volatility asset class, 2018 overall provided a sequence of outcomes that gave factor-heavy implementations the ability to capture their downside potential. Solid internal diversification paired with a considered portfolio construction went a long way in mitigating these perils.”

Jaeger’s note says that alternative risk premia (ARP) strategies have had only two negative years since 2004 – 2008 and 2018. “Having traded through both down years, I can say with conviction that 2008 and 2018 have nothing in common (besides the stock market being down in both years, but that applies to many other years), he says. “Crucially, however, ARP was still in its infancy in 2008, and 99 per cent of the current ARP providers had not yet been established. Consequently, many providers and ARP investors simply had not experienced a negative year prior to 2018. In addition, some of the more glamorous back-tests presented to prospects firmly implied they should not expect such a scenario, we would go as far as to say that some back-tests were over-fitted to be optimised for 2008 – intentionally or not.”

The GAM risk premia strategy has just under A$4 billion invested, most of this sourced from Australian institutional investors, Morgan says. Shed Enterprises has represented GAM in Australia and New Zealand for about 14 years. The risk premia strategy has seen inflows from Australian Investors of about $750 million in the first half of this year.

– G.B.

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