MJ Hudson research finds alternative risk premia (“ARP”) funds may have reached $200bn AUM, despite challenges

Portfolio diversification and transparency seen as the key benefits of alternative risk premia, according to MJ Hudson Allenbridge survey.

The MJ Hudson Allenbridge Alternative Risk Premia Fund Review 2019 estimates that there are now from $150bn to $200bn of assets in global alternative risk premia funds following a long/short, multi-strategy approach. This estimate excludes strategy offerings by investment banks.

The 2019 survey was conducted using an online questionnaire. 25 asset managers participated, representing the majority of the assets managed in this market.

Key findings in the report:

  • Market estimated to range from $150bn to $200bn in long/short, multi-strategy alternative risk premia funds. The survey respondents themselves manage more than $120bn.
  • Despite the challenges with performance, 46% of our survey respondents reported AuM growth in excess of 20% in 2018. Larger managers experienced faster growth than smaller managers.
  • The average level of management fees (0.82%) has remained stable since our 2017 survey
  • Pension funds remain the most important client base for ARP managers, while the role of asset managers is increasing. Existing hedge fund allocations are the most important source of funds, whereas the respondents expect less allocations from low-risk assets compared to 2017
  • Recent performance of ARP funds (notably during 2018) is considered the largest impediment to further investment. The industry is still seen as difficult to navigate given the large number of seemingly similar strategies, but concerns of crowding have dissipated somewhat since 2017
  • The average ARP fund returned -7.5% (in excess of cash) in 2018, with a volatility of 6.1%. Dispersion in returns is significant, as individual fund returns ranged from -13.6% to +3.4%
  • We show that over 75% of broad ARP industry performance can be explained by reference to six individual strategies – three equity factors, a short equity volatility strategy, FX carry, and multi-asset trend following. Individual funds have greatly varying sensitivities to the core strategies, and had annualized alphas ranging from -11.5% to +2.8% in 2018

Odi Lahav, CEO of MJ Hudson Allenbridge explained:
“MJ Hudson Allenbridge has been closely monitoring the factor investing market since 2014. Following our broad survey of asset manager and investment bank factor strategies published in late 2017, we felt it appropriate to comment on the performance and trends we witnessed during 2018. This report presents the results of a survey of 25 asset managers offering diversified multi-asset alternative risk premia (ARP) funds. In addition to the survey results, we also present an overview of 2018 returns and their drivers.  We thank all the managers for taking the time to participate.

Our goal is to provide market-leading research and advisory solutions to institutional clients, such as pension funds, insurance companies, sovereign wealth funds and other institutional investors.”

Antti Suhonen, one of the authors of the report and a Director at MJ Hudson Allenbridge added:
“Our 2019 Fund Review provides a comprehensive update on the alternative risk premia fund market, reflecting our on-going research in this area. We have examined in detail the developments of the asset management industry, including investor appetite and the nature of fund flows, and also related the performance drivers to our custom indices built on investment bank alternative beta strategies.”

Investors continue to value the portfolio diversification, liquidity and transparency benefits of alternative risk premia strategies, and despite a difficult time over the last year, nearly half of the survey participants reported growth in assets. In addition, diversity in the space is increasing due to the shifting boundary between alpha and alternative beta.

Given this increasing complexity the limited availability of live track records, it is important that expert advice is taken by any investors looking to implement these strategies. Whilst the promise of diversification may be appealing, selecting the right investment strategies for an investor’s specific requirements is no easy feat.”

Further information on MJ Hudson Allenbridge’s systematic factor and asset allocation advisory services can be found at https://www.mjhudson.com/advising-asset-allocation

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This report presents the results of a survey of 25 asset managers offering diversified multi-asset alternative risk premia (ARP) funds.  In addition to the survey results, we also present an overview of 2018 returns and their drivers.

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