Diversification mandates lead the way: Research

Alternative risk premia mandates from institutional investors decreased slightly last financial year, but it's hardly a global slowdown, according to an international investment consultant.

The latest asset manager intelligence and market trends report from bfinance shows alternative risk premia (ARP) mandates have settled after increased activity between 2015 and the first half of 2017.

Allocations to ARP made up 6% of diversifying strategies mandates in the 12 months to June 2018, bfinance said. The most popular diversifying strategy allocation was hedge funds (44%), followed by multi-asset (19%) and portfolio-level overlays in areas such as equity, currency or liability risk (19%).

Speaking to Financial Standard in London, bfinance head of risk and diversifying strategies Toby Goodworth said while ARP mandates have dipped slightly, there's good logic underlying it.

Goodworth explains the firm tracks more than 60 risk premia products - some are new with less than a year's track record, and others are well established. Last year, the average risk premia track record was about three years, "which is kind of the milestone for moving from emerging products to established products."

This three-year time period saw plenty of interest for new buyers of risk premia, Goodworth said. It mostly came about because institutional investors were often interested in getting diversification but were structurally prohibited from buying products that looked like hedge funds.

"A lot of new assets were on the scene that wanted everything risk premia had to offer but couldn't buy things that looked like hedge funds. The product might have formerly been defined as a hedge fund or it could have been the liquidity profile or performance element - whatever it was, there was a cohort of buyers that couldn't access hedge funds but potentially could access risk premia," Goodworth said.

Nowadays there are generally two groups of investors: new buyers or those who already have exposures and are looking to extend or evolve their investment program.

"It's not risk premia falling out of favour, it's just the initial cohort of buyers have bought. A lot of clients globally are interested in risk premia," Goodworth said.

The attraction to risk premia has seen strong interest from regions such as the UK, Germany, Italy, Canada and Australia, he added.

"The aim is not to lock the portfolio down with a hedge. The aim is to diversify equity risk into other forms of positively rewarded risk assets," he said.

"In this respect, risk premia ticks a lot of boxes because some of the other trends we're seeing are the preference for liquid solutions, particularly on the liquid alternatives side. If I look at most of the projects we've done, the liquidity timeframe has fallen to one month or better and risk premia fits that bill."

Overall, the diversifying strategies segment accounted for more than 25% of assets allocated in the 12 months to June 2018, the bfinance quarterly report said.

The investment consultant also noted the first quarter of 2018 saw a decline in risk appetite. It said wariness persisted through the second quarter, "although multi-asset managers appear to be remaining overweight growth assets."

It said emerging markets - particularly equity and debt, private debt, real assets and hedge funds were among the most popular destinations for capital in the last financial year.

Read more: bfinanceFinancial StandardToby Goodworth
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