Risk Premia and Smart Beta, investment solutions traditionally defined as strategies that aim to capture risk-adjusted returns and improve portfolio diversification, remain at the forefront of investors’ agendas.
That’s according to a recent survey of investors and intermediaries, primarily institutional, representing close to USD1 trillion of combined assets under management, by Citi’s Prime Finance Capital Introduction team.
Eighty one per cent of respondents are currently investing in, or looking to invest in, Risk Premia solutions, and 83 per cent of those who are currently investing in Risk Premia are doing so through Multi-Factor strategies. The main drivers for Risk Premia investing are volatility mitigation (46 per cent of respondents) followed by return optimisation (36 per cent of respondents).
According to research conducted by Citi, AUM in Smart Beta and Risk Premia funds are projected to rise from USD265 billion in 2014 to USD1.2 trillion by the end of 2019 – making this the fastest growing product set in the asset management industry. Citi analysts have also noted a strong interest in Smart Beta ETFs, with 45 new products launched in 2015 including 19 “Multi-Factor” products.
The identification of factor-based investment themes (“Factors”) is at the core of Risk Premia and Smart Beta strategies. Factors such as “value”, “momentum” or “growth” have been identified as key characteristics driving the behaviour, performance and volatility of a security beyond traditional sector or geographical exposure.
The shift from a traditional to a factor-based, risk-adjusted portfolio can be a complex exercise as it requires dynamic collection of factor data. With 48 per cent of survey respondents having less than 20 in-house investment professionals, there is often limited capacity to analyse portfolios in the necessary depth or timeframe. Against that background, the rising interest in Risk Premia investment solutions is likely to drive an increased need for resources in technology and in-house data management skills. It will also encourage fund managers to use strategic partners that can advise on tactical portfolio adjustments based on real-time position reporting.
“The adoption of style and factor-based strategies can help investment managers identify determinant market shifts and implement differentiated strategies away from consensus trades,” says Christian Raute, Global Head of Citi’s Central Risk Desk Strategy. “These strategies require sophisticated technology and trading solutions in order to be fully effective.”
In order to help clients achieve this goal, Citi has developed a tradable suite of equity indices based on a wide spectrum of Risk Premia Factors. Citi’s Equity Quantitative Strategy team also provides clients with a unique tool that assesses portfolios according to traditional measures (beta, delta, country exposure and sector), as well as macro factors (rates, GDP, spreads, commodity prices, FX), and investment Factors (value, growth, quality, low risk, price momentum, estimates momentum, and size).
According to 69 per cent of respondents, hedge funds are the preferred investment vehicle for accessing Risk Premia, followed by investment bank products (15 per cent of respondents), customised solutions developed in-house (8 per cent), and ETFs (8 per cent).
Long-term confidence in hedge funds remains strong amongst the institutional investor community: 63 per cent of respondents have more than USD1 billion allocated to hedge funds, with half of investor allocation exceeding USD2 billion. A majority (53 per cent) of asset allocators stated they were planning on increasing their exposure to hedge funds over the next three years – with Macro, Equity Long-Short and CTAs being the preferred investment strategies.
Daniel Caplan, EMEA Head of Investor Services Sales, Citi, says: “Hedge funds represent a third of profits generated by the asset management industry and these findings confirm the importance of the sector to institutional investors. As interest in Risk Premia solutions continues to rise, we expect hedge funds to play an increasingly important role in providing diversification through risk-aligned strategies.”
