The Common Drivers behind Alt Risk Premia’s Difficult Year
Though 2018 was challenging for alternative risk premia (“ARP”) managers and investors, it was a very interesting year from a research perspective.
Those who were waiting for the ARP industry to face its first “real” test got their wish in 2018 which proved to be a very challenging and revelatory year. In 2018, all the main risks of ARP investing, including overly simple factor construction and inadvertent market exposure, forced selling/deleveraging, recorrelation risk and lack of diversification, materialized in the same 12-month period. Using PCA helps understand the strategies that drove losses industry-wide, while regression analysis reveals the exposure of individual funds to these strategies.