Introduction to alternative risk premium investing

Ashish Tiwari

This chapter provides an introduction to alternative risk premia (ARP) investing. We begin with a review of major ARP and describe how they differ from “smart” beta. Then, we offer key considerations for robust design and portfolio construction from a practitioner’s perspective. Finally, we outline an approach that asset owners can utilise to build an ARP programme tailored to their investment goals and select appropriate managers. Throughout the chapter, our focus is on highlighting real-world challenges and bridging the gap between theory and practice.

There are three key takeaways. First, ARP strategies should be viewed as scalable alpha strategies instead of alternative beta strategies due to the vast differences in universe selection, strategy construction and implementation. Second, careful selection, ongoing assessment and steady evolution of the opportunity is critical as new alternative factors are discovered and some existing ones, such as equity value and time series momentum, experience an erosion in their Sharpe ratio. Finally, allocators should view ARP as a strategic asset allocation decision and should be mindful of their managers’ style biases. Similar to hedge