Alternative risk premia (ARP) investment products have lost their lustre during 2021, courtesy of several years of poor performance. This track record will make it increasingly tough for ARP strategies to gain a great deal of traction with Asian asset owners – a set of investors they were already struggling to penetrate.
Industry advocates claim regional asset owners are warming up to them, particularly those in Japan and Australia. However, Japan’s Government Pension Investment Fund and Australia’s Aware Super both told AsianInvestor that they do not use the strategies, while declining to elaborate.
China Investment Corporation, China’s sovereign wealth fund with $1.05 trillion of total assets, has spent years considering whether to use ARP strategies, but has yet to do so.
“We started looking at them several years ago but still have not invested in them ... we’re still considering it but need quite a long time to make a decision,” said the senior investment executive.
“My understanding is this product has its own advantages but it’s difficult to employ. On a large scale, it has a higher demand on investors’ understanding as it is not transparent,” he added.
Indeed, while ARPs may be easier to analyse than typical hedge funds, they are far from an open book. The funds use a lot of over-the-counter investment tools to take position.
Asian investors have other concerns too. For all their claims of scalability, large asset owners are likely to find that ARP strategies cannot absorb the sort of sums they like to deploy, which means it is not worth spending the resources on building valuation models and manager due diligence.
Benjamin Deng, CPIC
As a result, it is unlikely the funds will become a mainstream investment product for big asset owners, said Benjamin Deng, group chief investment officer of China Pacific Insurance Company, which had Rmb1.6 trillion in investment assets.
“Will it beat one’s own portfolio [performance]? It’s hard to say. If so, then why give away the management fee,” he told AsianInvestor.
Even industry advocates admit to the limitations of ARP products.
“It’s a very strong position to take, but sometimes it becomes a little bit complicated because it’s very mathematical, very focused on finding opportunities in the market. It’s very cut and dried,” said Paul Sandhu, head of multi-asset investment stategies at BNP Paribas Asset Management.
Paul Sandhu, BNP
“ARP can be very complex; a lot of people would not understand the full working of it,” agreed Moir. “From the trading perspective, I’d say the most complex parts are the non-linear strategies. You need to understand the risks that you’re taking on and have the ability to trade it if you’re going to do it yourselves.”
However, industry advocates are still hopeful that things will get better.
One point of light: not all ARP strategies failed this year. Matt Talbert, senior investment manager at the Texas Teachers pension fund, complimented ARP mandates that were specifically designed to be defensive.
“This is one of the benefits of customised mandates with broker dealers, in which you can embed more explicitly defensive structures,” he told AsianInvestor, pointing to the use of put options to create a stop loss or an explicit equity tail hedge. “That served a lot of folks well in the first quarter [of 2020].”
In addition, despite the general failure of ARP strategies to perform, asset owners do not outrightly reject its potential.
“I will want to learn about ARP strategies’ rationale, methodology and track record. If all the three are reasonable and favourable, then I will probably try with a teaser amount,” an investment executive of another leading sovereign wealth fund in Asia told AsianInvestor.
Canada Pension Plan Investment Board (CPPIB) is also staying the course, despite its risk premia strategy programme losing C$1 billion ($760 million) in the year to March 31, 2020. CPPIB declined to comment on whether it had redeemed any funds from ARP strategies, but a spokeswoman said in December 2020 that “the performance figure is one snapshot which is not pertinent for a programme that is designed and measured over multiple cycles” – an indication that it is still somewhat hopeful about the vehicles.
Meanwhile, in early December, the Iowa Public Employees’ Retirement System (IPERS) approved the first internally managed investment programme intended to systematically invest in ARP. It will start with a relatively modest amount of exposure ($300 million) .
If the funds can improve their performance, the opportunity is there. After all, asset owners are keen to get a form of hedge fund-like exposure with equities at an all-time high, bond yields are low or negative, and people desperate to source excess returns and diversify portfolios, said Moir.
But the strategies need to start demonstrating that the last couple of years has been an anomaly, and that they can live up to their potential. Until they manage that, their appeal in Asia is likely to prove very limited.
This article was adapted from a feature on alternative risk premia products that originally appeared in the Winter 2020/21 edition of AsianInvestor magazine.
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