Alternative risk premia : is the selection process important?

Naya, Francesc (TIMWETECH, Lisbon, Portugal) ; Tuchschmid, Nils S. (School of Management Fribourg, HES-SO // University of Applied Sciences Western Switzerland)

Alternative Risk Premia (ARP) are rule-based strategies. They should reward investors exposed to non-traditional systematic risk factors. Yet, allocation to ARP is not straightforward. First, there are many ARP indices proposed by different providers that claim to capture the same underlying risk premia. Second, a proposed index may not automatically mimic an existing risk premium whose performance is sustainable or persistent. Our findings confirm these suspicions. If some categories of indices show risk-return characteristics that are rather homogeneous, others are highly heterogeneous. Stated otherwise, performance is provider dependent making the choice of an index an important component of the allocation process. Differences between simulated past results and live data are then calculated. Results are indisputable. There is a significant overfitting bias. Once launched, the performance of ARP indices dropped significantly, thus questioning their sustainability. To summarize, this research paper shows that investors should take no short cuts. When it comes to allocating capital to ARP, an extensive due diligence process is required.


Article Type:
scientifique
Faculty:
Economie et Services
School:
HEG-FR
Institute:
Aucun institut
Subject(s):
Economie/gestion
Date:
2019-06
Pagination:
14 p.
Published in:
The Journal of wealth management
Numeration (vol. no.):
2019, vol. 22, no. 1, pp. 25-38
DOI:
ISSN:
1534-7524
Appears in Collection:

Note: The status of this file is: restricted


 Record created 2019-06-19, last modified 2019-07-19

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