Alternative Risk Premia and Market Drawdowns: A Performance Review

Abstract

Alternative Risk Premia investment products have attracted substantial interest from institutional investors in the recent decade, as they are supposed to provide risk premia other than traditional equity and bond premia, to which investors already have exposure. This article reviews the performance of ARP products available to investors, both in the form of investment bank indices that provide exposure to individual ARP strategies and of asset manager diversified multi-strategy ARP funds. Our results suggest that, as standalone investments, ARP so far have failed to provide the expected results. Their performance has been generally negative, and they also have suffered from large losses during equity market drawdowns. Even though they do not provide high positive returns, however, some ARP show risk-return profiles that could be valuable, especially for risk-mitigation purposes, when incorporated into balanced portfolios with exposures to traditional risk premia.