News category: Alternative Risk Premia

Senior European portfolio managers at Europe EQD in Barcelona discussed where they are looking for alpha and how they are protecting and managing their portfolios in a panel discussion that opened day one of the event.

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The Cincinnati Retirement System has approved a number of changes to its asset allocation profile by reducing its exposure to the value factor and international equities to fund investments in fixed income. Investment consultant Marquette analyzed a significant bias toward value in its asset allocation study for CRS’ USD2.2 billion public equity portfolio and proposed that the pension lower its holdings in large, middle and small-cap equities.

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U.S. consultant Mercer reported that the increasing cost of capital and tighter bank lending are looming threats for defined benefit pension plans, emphasizing the need for allocators to focus on credit, collateral and longevity risk. This type of environment calls for a balancing act, their words not mine, considering the ongoing risks in pension portfolios and the uncertainties surrounding inflation and global economic shifts.

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At a time when many commodity trading advisors have struggled, USD34 billion Danish pension plan Velliv has found value in long-term CTAs and more exotic contracts, such as Cocoa and Mexican Peso. Christoph Junge, head of alternatives at Velliv, said he will be adding more CTAs to the plan’s liquid portfolio next year to further diversify the portfolio. 

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The second half of the year has seen growing investor appetite for liquid alternatives in Australia. This includes hedge fund strategies, systematic strategies and alternative risk premia. Josh Heller, head of solutions at investment management firm Challenger in Sydney, said more education about the strategies as well as market volatility and the correlation between equities and bonds has driven this growing trend as investors hunt for diversification.

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Increased market volatility, prompted by tightened credit conditions and growing geopolitical tension, has meant some academic-backed strategies, such as traditional Fama French factors, have not delivered performance this year. Academic strategies work best when the company fundamentals drive equity market returns instead of macroeconomic variables, such as inflation and central bank rates.

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The USD76 billion Pennsylvania Public School Employees’ Retirement System has lost most of its private equity team after cutting back on allocations to private assets, Bloomberg reported. PSERS, apparently, is one of a select few institutions willing to side with notorious PE-enemy Cliff “Stop The Volatility Laundering” Asness and others in questioning the high, steady

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Kari Vatanen, chief investment officer at Veritas, a EUR4.3 billion pension insurance company in Helsinki, said he is adding credit carry strategies to his alternatives portfolio as a way to boost returns. The changeup comes with the expectation that there won’t be a wider financial crisis next year, Vatanen said.

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Officials at EUR110 billion BBVA Asset Management are exploring the possibility of replacing part of the risk assigned to equities in the firm’s asset allocation portfolios with exposure to systematic long-only factors in equities. Laura de Frutos, head of alternative risk premia at BBVA AM in Madrid, said this is because systematic factor investing can add value. “It has been academically and empirically proven that factors extract market betas in an efficient way,” she said.

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Asset managers and banks are tapping into rising investor interest in factor investing across commodities, designing a range of products that investors are using to add diversification or hedge inflation and other risks.

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