Workhorse or Trojan Horse? The Alternative Risk Premium Conundrum in Multi-Asset Portfolios

Abstract

Diversified alternative risk premium (ARP) portfolios seek to generate absolute returns using a broad range of systematic trading strategies incorporating multiple investment styles covering all the major asset classes. Against a backdrop of low developed market bond yields and fully valued equities, ARP offered a reasonably priced combination of low correlation with traditional asset classes, attractive expected Sharpe ratio, and reasonable liquidity. Following a period of rapid adoption, disappointing performance over the 2018–2020 period has produced considerable soul searching regarding the role of ARP in institutional portfolios. Should these strategies remain a candidate for multi-asset portfolios, or is the experience of the past years a death knell regarding their usefulness? To examine this very topical issue, in this article, the authors use a unique array of benchmarks leveraging a proprietary database of 2,000 tradable bank indexes. They evaluate whether recent returns are consistent with long-term expectations. In the process, they consider the extent to which unique environmental headwinds and a lack of true breadth across ARP strategies contributed to this outcome.