As opposed to traditional risk premia, i.e. a long exposure to equities and a long exposure to bonds, alternative risk premia can be found in all asset classes (equities, rates, credit, currencies and commodities) and correspond to long/short portfolios. It can be viewed as an extension of the factor investing approach found in equities. More precisely, ARP include two types of risk premium strategies: skewness risk premia, which reward for taking systematic risk in bad times (e.g. carry and value risk premia) and market anomalies (e.g. the momentum risk premium).
The returns of alternative risk premia show heterogeneous patterns in terms of statistical properties, option profile and drawdown. In this context, investors need to go beyond volatility diversification, which is a tactical asset allocation decision, and the right answer for implementing a strategic asset allocation is to consider a stress budgeting approach based on the skewness risk. Another challenge concerns the convexity properties of ARP and how these new patterns change the construction of performance portfolios in presence of liabilities. Just like factor investing in equities, ARP is a key area of development for the asset management industry as it highlights the growing convergence between traditional active management and alternative investment.