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George Szemere : "Our investment process leads us to include 25-40 different risk premia in the portfolio"

According to George Szemere, Head of Global Strategic Relations & Liquid Alternatives, Columbia Threadneedle, there is a growing understanding that extracting returns from a traditional asset-allocation mix is going to be challenging…

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Next-Finance : Have you noticed more interest for ‘alternative risk premia’ from investors since the market environment has become more challenging?

George Szemere : We have seen the interest in and understanding of alternative risk premia advance significantly over the course of this year. This is not surprising given investors’ increasing willingness to embrace alternatives for their diversifying potential. There is a growing understanding that extracting returns from a traditional asset-allocation mix is going to be challenging. And of course the cost advantage that a risk premia approach can offer makes them compelling as well.

Can you give an example of ‘alternative risk premia’ strategy and how it works?

The value factor for example refers to the tendency of inexpensive assets to deliver above market returns and expensive assets to deliver below market returns. An equity value strategy would buy the cheapest 20% of stocks and sell most expensive 20% of stocks ranked on price-to book. Alternative risk premia also exist in merger arbitrage, where there is a risk that a previously announced corporate deal will not be completed. This deal risk premium can be captured by going long the target stock while shorting the acquirer stock, across all announced deals. Other examples of capturing risk premia include: Fixed Income momentum: buy government bonds ranked highest and sell government bonds ranked lowest based on 12-month returns; Currency carry: buy currencies ranked highest and sell currencies ranked lowest based on local short-term interest rates.

Alternative risk premia also exist in merger arbitrage, where there is a risk that a previously announced corporate deal will not be completed.
George Szemere, Head of Global Strategic Relations & Liquid Alternatives, Columbia Threadneedle

You are trying to capture different risk premia through a wide range of asset classes and a multitude of strategies. How many different strategies can you have in the portfolio? Are they not correlated with each other? Do you monitor the correlation between the different strategies implemented in the fund?

Our investment process leads us to include 25-40 different risk premia in the portfolio which should exhibit very low correlations with each other. We monitor these correlations constantly.

Do you monitor the correlation with the market? Is there an ‘equivalent’ exposure per asset class targeted (equities, fx, credit, interest rates and volatility)?

Yes we monitor correlations with broad markets. The strategy diversifies across five asset classes and across risk premia within those, but we do not have a targeted asset class exposure or mix.

How much of an institutional portfolio should be allocated to alternative risk premia in your opinion? How do you help institutional clients navigate the risks and the complexity of the different alternative risk premia strategies?

This question really depends on what institution we are talking about and how they classify risk premia. Institutions have typically allocated up to 20% across alternatives and risk premia can be a component or replacement in this category. Some may prefer to place risk premia alongside traditional allocations. We need to consider both investor goals and their objective. For many of the investors that we are talking with, reducing portfolio correlation with overall markets is a significant goal, and risk premia have very compelling qualities in this regard. We have been engaged in conversations with many investors who want to build low-cost, uncorrelated, and diversifying multi-strategy risk premia portfolios with daily liquidity. In some cases, our conversations have been educational— helping investors understand the benefits of factor-based investing and the persistent drivers of return that we see and capitalize upon across asset classes. We can also provide solutions tailored for different investor needs: in addition to a standalone multi-strategy, multi-asset class portfolio, where all five asset classes and all of the long/short, arbitrage, and relative value structures are represented, we can also build a customized “completion portfolio,” which is meant to complement factor exposures represented in a particular portfolio.

For many of the investors that we are talking with, reducing portfolio correlation with overall markets is a significant goal, and risk premia have very compelling qualities in this regard.
George Szemere, Head of Global Strategic Relations & Liquid Alternatives, Columbia Threadneedle

How much do you manage in alternative risk premia? Is there a capacity constraint for the fund? What is the performance target and the volatility target? Sharpe ratio? Sortino ratio? Var 1 month? Cvar 1 month?

We manage shy of 800 millions USD notional globally across risk premia. For our UCITS fund we have put $2bn as an initial check on capacity. We target 7.5% volatility with a sharpe ratio of c. 1.

RF , October 17

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