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The MJ Hudson Alternative Risk Premia Fund Review 2021

Performance remains top concern for alternative risk premia managers after a turbulent year for the industry, MJ Hudson research finds.

MJ Hudson has been closely monitoring the factor investing market since 2014. Continuing our series of regular market reviews, we are pleased to announce the publication of the latest Alternative Risk Premia Fund Review that presents an overview of industry performance in 2021 along with selected fund managers’ perspectives on the results and outlook.

Key findings in the report:

  • After a year of satisfactory performance in 2019, last year was very disappointing for the ARP fund industry. The average fund in our monitored universe produced a return of -9.98% (in excess of cash), a worse outcome than 2018 when the average fund lost -7.5%
  • Manager performance remained diverse, ranging from +13.7% to -26.3%, but just five out of the 28 reviewed funds produced a positive return for the year
  • The funds suffered most of the losses during the initial pandemic-related turmoil in February – March. Notably, while many risk assets posted a rapid V-shaped recovery from Q2 onwards, most ARP funds failed to participate in the rally
  • Equity market strategies, especially those involving single stocks, contributed significantly to the losses. The Equity Value strategy struggled throughout the year, but unexpected turbulence also hit traditionally defensive strategies such as Equity Low Beta during the COVID sell-off. On the positive side, macro strategies such as Trend Following and FX Value helped to balance off some of the losses
  • Portfolio de-risking explains in part the failure of the funds to take part in the recovery, as evidenced by both quantitative analysis and manager comments
  • 2020 has prompted several managers to re-evaluate and in some cases completely re-structure their approach to single-stock strategies. Dedicated defensive strategies are another area of current industry focus
  • Investor response to recent losses has been understandably one of disappointment, and many managers did experience at times sizeable redemptions during the year – leading to some closures of flagship ARP programs. At the same time, other managers reported recent inflows to their programmes

Odi Lahav, COO MJ Hudson explained:

“MJ Hudson Advisory has been actively engaged in the Alternative Risk Premia space and provided timely market research for over six years. As a business, we are focused on the full range of alternative investment strategies as well as innovations in fund management.

We believe that it is important to provide high quality research, opinions and data to our clients and the markets across the spectrum of asset classes. The Alternative Risk Premia Fund Review 2021 provides unique insight and a comprehensive view into this diverse market, which we hope is useful to both institutional investors and fund managers alike.

Once again, we would like to thank all the managers who generously took the time to contribute to the study.”

Antti Suhonen, Senior Advisor at MJ Hudson and Professor of Finance at Aalto University School of Business, Helsinki added:

“While alternative risk premia as a dedicated product may reduce in prominence, its underlying toolkit will remain important for quantitatively oriented investors. It will be interesting to see how ARP performance responds to an environment of higher economic growth and inflation. There are some early signs that this is starting to feed through positively into performance numbers.

Having monitored this industry closely since 2014, we remain committed to providing our clients with comprehensive, in-depth, and relevant analysis tailored to address their specific objectives.”

The Alternative Risk Premia Fund Review 2021 can be downloaded here.

Further information on MJ Hudson systematic factor and asset allocation advisory services can be found at:

www.mjhudson.com/expertise-single/asset-allocation-advice/