Performance remains top concern for alternative risk premia managers despite a better year for the industry, according to new research by MJ Hudson Allenbridge.The Alternative Risk Premia Fund Review was conducted using an online questionnaire with 34 asset managers participating, representing the majority of the assets managed in this market.
In 2019, ARP funds performed broadly in line with our long-term expectations, with the median fund returning +3.04 per cent in excess of cash, corresponding to a Sharpe ratio of 0.7.
The returns have been in line with other liquid alternative investments, but lagged exceptionally strong equity and bond markets.
Individual manager performance, both in terms of returns, and asset raising, continues to be diverse: Returns ranged from -17 per cent to +12 per cent, and 41 per cent of the managers saw AuM increase in excess of 20 per cent in 2019 whereas 38 per cent experienced an AuM decline greater than 5 per cent.
MJ Hudson Allenbridge estimates global ARP fund assets total around USD 200 billion.
The managers reported average fixed fees of 0.71 per cent pa, a decline from 0.82 per cent in 2019. Adjusted for volatility, fees average 0.80 per cent for 8 per cent target volatility
Pension funds remain the most important investor type for ARP funds, and most of the assets into ARP are expected to come from hedge fund allocations.
The survey shows that 75 per cent of broad ARP industry performance can be explained by exposure to six common risk factors. Equity-linked strategies were the main detractors from performance in 2019.
Portfolio diversification remains the key benefit that investors seek in ARP investments, while managers consider recent performance of the strategies – lagging traditional assets in 2019 and not providing meaningful diversification in 2018 – as the main challenge in raising new assets.
Odi Lahav, COO of MJ Hudson, says: “MJ Hudson Allenbridge has been actively engaged in the Alternative Risk Premia space and provided timely market research for over five 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 2020 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, the main author of the report and Senior Adviser at MJ Hudson Allenbridge, adds: “We are pleased to publish our latest ARP Fund Review that had a record number of managers taking part. To us, 2019 was a story of the glass being three-quarters full, with funds broadly meeting our long-term risk-adjusted return expectations with a Sharpe ratio of 0.7. On the flipside, the industry lagged the exceptional results achieved by equities and bonds. Performance dispersion between managers remains vast, which complicates the task of an asset allocator in a strategy that continues to be marketed under the single title “ARP”. 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.”
