Alternative Risk Premia
UK Corporate Pension Plan | October 2016
Engagement at a glance
A UK corporate pension plan sought a comprehensive review of the alternative risk premia manager landscape with a view to investing over £250m with 2 – 3 diversified Alternative Risk Premia (ARP) managers, in aggregate targeting a return of cash plus 3-8% per annum.
This was the investor’s first allocation to alternative risk premia. With a principal objective of diversifying an equity-rich portfolio, this client sought lower net exposure / market neutral approaches over more directional strategies. They also had a preference towards academically well-established premia as opposed to more esoteric or “practitioner” premia (see The Changing World of Alternative Beta). The inclusion of trend-following premia was viewed positively by the fund, despite its embedded directionality (we find this to be a dividing line among investors), given the strategy’s historically strong diversification potential.
- The client did not want to restrict themselves to established ARP strategies, and was able to consider newer offerings. This made a significant difference in this sector, which has undergone a rapid expansion in terms of the number of products. This preference also fit well with the bfinance ethos of ‘reaching wide’ at the time of search, rather than restricting the scope to a previously established shortlist.
- Outcome-oriented assessment proved to be important in determining the managers that progressed to the later stages, particularly the risk / return profile and drawdown Fees we also an important consideration for this client: several offers were excluded as being simply too expensive for further consideration.
- Second stage analysis focused not only on the quality of the investment process and portfolio construction, but also on the efficiency of implementation. Key here was the ability to offer a thoughtfully constructed, broadly diversified range of premia using either existing firm scale, or a proven efficiency in trading both physical and synthetic instruments in order to implement these portfolios with minimised market impact.
- Ultimately, of the 12 managers considered in detail at the second stage, just 4 were seen face-to-face by the client, with 2 managers selected for investment.
Our specialist says
Ultimately, the client achieved some extremely competitive fees. However, the search process revealed that even a perceived ‘low-cost’ space is not homogenously low cost. The ARP universe is somewhat unique in its positioning, transcending both the hedge fund / alternative space and the traditional asset management space, contributing to wide fee dispersion. Since this search, we have continued to see fee evolution within the ARP landscape, with new entrants able to offer early-bird discounts, and more established managers offering fee tiering for scale.