The hunt for decorrelated returns is pushing fund buyers into risk premia strategies but they don't always know what they are actually buying.
That is according to PremiaLab’s co-founder Adrien Geliot. PremiaLab is a data, research, and analytics platform for systematic trading strategies.
Geliot told Citywire Selector many investors have been disappointed with hedge fund performance and have therefore been pushed towards risk premia funds.
'These investors are now looking for more liquidity, greater transparency, and lower fees. This has led to the development of risk premia strategies, which provide a diversified performance engine available in transparent and cost-efficient formats for asset allocators globally.'
Here, Geliot said, lie some of the challenges fund buyers may be overlooking.
'With the rapid growth of risk premia and smart beta, investors are facing increasing challenges in differentiating between providers and products. Institutional investors need to understand how portfolios are constructed and measure how efficiently strategies are being implemented.'
Geliot’s comments come as Syz Asset Management expanded its range of equity market neutral funds with the launch of the OYSTER Equity Premia Global fund. Last year also saw a swath of risk premia funds being launched from firms such as Unigestion and German boutique Quoniam.
With so many funds being launched, Geliot said it’s important to measure the value added by each manager and the index provider.
'Some funds allocate across investment banks’ systematic indices, while others design algorithms for certain types of strategies or asset classes and outsource the execution to investment banks.
'For instance, it may be more efficient to outsource the trading of volatility strategies to an investment bank with strong trading and execution capabilities rather than doing it internally.'
Geliot said investors are focusing on the transparency they can achieve in their investments. 'Insurance companies, for instance, require full transparency on the underlying positions.
'Fees are also an important matter and need to be analysed not only at the fund level – such as management fees or performance fees – but also on the underlying trading costs of the strategy.
'Portfolio construction and leverage are important points to assess as some managers will use various allocation methodologies such as risk parity or equal risk contribution. This is as well as various levels of leverage parameters that can have a significant impact in case of market stress.'