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Odi Lahav, M J Hudson Allenbridge

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Risk premia (ARP) funds may have reached USD200bn in AUM, says MJ Hudson research

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The MJ Hudson Allenbridge Alternative Risk Premia Fund Review 2019 estimates that there are now from USD150 billion to USD200 billion 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 of 25 asset managers representing the majority of the assets (USD120 billion) managed in this market. 
 
Despite the challenges with performance, 46 per cent of our survey respondents reported AUM growth in excess of 20 per cent in 2018. Larger managers experienced faster growth than smaller managers.
 
The average level of management fees (0.82 per cent) has remained stable since MJ Hudson’s 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 per cent (in excess of cash) in 2018, with a volatility of 6.1 per cent. Dispersion in returns is significant, as individual fund returns ranged from -13.6 per cent to +3.4 per cent.
 
Over 75 per cent 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 annualised alphas ranging from -11.5 per cent to +2.8 per cent in 2018.
 
Odi Lahav (pictured), CEO of MJ Hudson Allenbridge says: “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, adds: “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.”

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