Investing Ideas

Alternative risk premia: Building blocks for resilient portfolios

Alternative risk premia offer the potential for attractive and durable returns driven by economic motivations, and/or behavioral sources, and they can be harvested through quantitative, rules-based, long-short investment strategies to provide diversifying returns compared to traditional asset classes.

By: Farouk Jivraj Thomas McFarren Sladja Carton
Updated: 2/22/2024
Key Takeaways
  • Alternative Risk Premia (ARP) offer the potential for attractive and durable returns driven by economic motivations such as compensation for structural risk and/or behavioral sources, and they can be harvested through quantitative, rules-based investment strategies.
  • ARP investment strategies typically use liquid securities to provide valuable diversifying returns that differ from conventional, long-only exposures to traditional asset classes. They are implemented via long-short investment techniques, often with the ability to use derivatives and leverage.
  • Academic research has demonstrated that hedge funds make use of ARP styles either directly or indirectly.1,2 The emergence of dedicated ARP strategies has thus created efficient access to risk premia that were historically harnessed in often higher fee products of specialized hedge funds.
  • These dedicated ARP strategies offer transparency, liquidity, cost efficiency, and scalability—they can be combined to create liquid alternative solutions to address a variety of desired investor objectives, such as diversification of equity risk, a marketneutral return profile, a more return-seeking exposure, or risk mitigation, to name a few examples.
  • While the origins and motivations of ARP strategies may be clear, we believe combining an objective-driven portfolio design process with proactive portfolio management is the key to successfully achieving desired outcomes.
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1. Sources: 2022 Fidelity Institutional Investor Innovation Study, May 2022 (institutions); October/November 2021 Fidelity Advisor Insights Survey; and The Cerulli Report—U.S. Alternative Investments 2022: Delivering Alternative Capabilities to Retail Investors (advisors). Market based on total assets and related metrics compiled in global indices, November 2022. Note: The summary above features data from several surveys; liquid and illiquid data usage do not sum. This analysis does not include digital assets, which Fidelity views as a type of alternative investment, given their shorter track records.

2. Survey of Capital Market Assumptions, 2022 Edition, Horizon Actuarial Services LLC. Annual survey of 40 investment advisors featuring their expected return assumptions.

Investing involves risk, including risk of loss.

Alternative investment strategies may not be suitable for all investors and are not intended to be a complete investment program. Alternatives may be relatively illiquid; it may be difficult to determine the current market value of the asset; and there may be limited historical risk and return data. Costs of purchase and sale may be relatively high. A high degree of investment analysis may be required before investing.

Diversification does not ensure a profit or guarantee against a loss.

Views expressed are as of January 2024, based on the information available at that time, and may change based on market and other conditions. Unless otherwise noted, the opinions provided are those of the author and not necessarily those of Fidelity Investments or its affiliates. Fidelity does not assume any duty to update any of the information.

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