Overview of Alternative Risk Premia (“ARP”) Strategies

Given the increased complexity and diversity of ARP strategies, we outline a framework for investors to navigate the ARP universe.

While alternative risk premia (“ARP”) strategies are capturing the attention of investors and the industry alike, these are not “new” strategies. Popularized by the work of Fama and French, countless academics have published papers on systematic exceptions to the asset returns predicted by the Capital Asset Pricing Model (CAPM) which was first introduced in the early 1960s. What is new is the number of investment products that now package these alternative risk premia using quantitative methods. This increase has been driven by investors who recognize the appeal of their attractive return profiles and low correlation with traditional asset classes. Alternative risk premia strategies continue to evolve, developing new methods and techniques to sharpen existing signals and systematically extract premia from expensive “hedge” fund strategies.

This paper describes the objectives of ARP strategies, the drivers of their returns and where they might fit in a portfolio, factors to consider when selecting an ARP manager.

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The Societe Generale (SG) Multi Alternative Risk Premia Index represents risk premia managers who employ investment programs diversified across multiple asset classes while utilizing multiple risk premia factors. These managers trade multiple asset classes such as equities, fixed income, currencies, and in many cases commodities, and aim to capture a diversity of discrete risk premia, including most prevalently value, carry and momentum. These multi-asset, multi-risk premia strategies are typically systematic. Single asset class and risk premia programs are excluded. The SG Multi Alternative Risk Premia Index is an equally weighed, non-investable index of funds.

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