Factor Investing and Risk Allocation: From Traditional to Alternative Risk Premia Harvesting

Jean-Michel Maeso, Lionel Martellini: The present publication was produced as part of the “Risk Allocation Solutions” research chair at EDHEC-Risk Institute, in partnership with Lyxor Asset Management.

Author(s) :

Jean-Michel Maeso

Quantitative research engineer at EDHEC-Risk Institute.  Lionel MartelliniProfessor of Finance at EDHEC Business School and Director of EDHEC-Risk Institute.

This chair is examining performance portfolios with improved hedging benefits, hedging portfolios with improved performance benefits, and inflation risk and asset allocation solutions. This study, “Factor Investing and Risk Allocation: From Traditional to Alternative Risk Premia Harvesting”, extends the analysis of factor investing beyond traditional factors and seeks to investigate what the best possible approach is for harvesting alternative long short-risk pemia. There is a growing interest amongst sophisticated institutional investors in factor investing. It is now well accepted that the average long-term performance of active mutual fund managers can, to a large extent, be replicated through a static exposure to traditional factors, which implies that traditional long-only risk premia can be most efficiently harvested in a passive manner. While the replication of hedge fund factor exposure appears to be a very attractive concept, the authors find that hedge fund replication strategies achieve in general a relatively low out-of-sample explanatory power, regardless of the set of factors and the methodologies used. Their results also suggest that risk parity strategies applied to alternative risk factors could be a better alternative than hedge fund replication for harvesting alternative risk premia in an efficient way. A key challenge for the alternative investment industry remains the capacity to develop investable efficient low-cost proxies for harvesting alternative risk premia not only in equity markets but also in the fixed income, currencies and commodity markets.
Pdf
Factor Investing and Risk Allocation: From Traditional to Alternative Risk Premi...
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Type : Publication EDHEC
Date : le 23/06/2016
Extra information : For more information, please contact EDHEC Research and Development Department [research@drd.edhec.edu]
Research Cluster : Finance

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