Low management fee costs have been an attraction compared to hedge funds
Cambridge Associates research shows that ARP funds have delivered better returns and lower volatility than competing ‘safe haven’ asset classes
LONDON (October 9, 2018) – Investment in the new, fast growing asset class of ‘Alternative Risk Premia’ (ARP) funds has delivered institutional investors better risk adjusted returns and more capital protection, suggests new research from Cambridge Associates, the global investment firm.
ARPs are often added to a traditional portfolio (e.g. equities and bonds) to diversify returns and lower risk, which is particularly important now that traditional asset prices are seen as stretched.
Cambridge Associates says that its research shows a balanced portfolio with a 30% exposure to ARP funds would have returned 12% to investors between January 2007 and March 2009 (during the credit crunch), compared to just 3% for a traditional balanced portfolio of bonds and equities.
Their research also shows that a balanced portfolio diversified with ARP funds would have grown by 65% between September 2012 and December 2017 compared to an average of 51.5% across a range of other common techniques for diversifying a portfolio, such as adding a safe haven currency*.
Cambridge Associates’ research covers $73bn of assets in 33 ARP funds.
ARP funds look to exploit persistent trends, often identified by multiple academic studies, that create biases in asset prices and, therefore, excess returns. These can include, for example, currency “carry trades” that generate returns by holding a higher yielding currency whilst borrowing in a low yielding currency.
As these fund strategies should be unconnected to broader market movements in equities or bonds they should deliver diversification and resilience in times of a sharp market sell-off.
Other ARP strategies might include:
- Value investing – long under-valued equities and short over-valued equities
- Momentum: investments that have outperformed recently tend to continue to outperform
ARP funds are also popular as their relatively straightforward strategies mean fees typically range between 0.75% and 1%. This can seem very competitive compared to the traditional ‘2 and 20’ of the hedge fund industry.
Cambridge Associates adds that investors considering an exposure to ARP funds should seek products that target factors proven over the long term and backed by multiple academic studies. While there are more than 300 potential factors targeted by ARP funds, most of these are not statistically significant.
Tomas Kmetko, Senior Investment Director at Cambridge Associates, comments: “More institutional investors are examining where their after-fee investment returns are going to come from in the coming years, and ARP funds have made a strong case.”
“Smoother returns, greater liquidity and lower fees is a very appealing combination for investors seeking diversification. If these strategies can successfully deliver on their objective, namely reasonable risk-adjusted returns over the cycle, we expect investors to increase their ARP allocations in the coming years.”
“However, the range of funds with track records of more than five years is limited.”
* Balanced portfolio comprises 60% MSCI World Index and 40% Bloomberg Barclays Global Aggregate Bond Index. Comparator portfolios on same basis, reduced pro-rata to include a 30% allocation to (1) the Cambridge Associates ARP sub-composite, (2) the Cambridge Associates Diversified Growth Fund sub-composite, (3) the Société Générale Trend Index, or (4) a proprietary blend of ‘flight to quality’ assets in CHF, JPY and USD
About Cambridge Associates
Cambridge Associates is a leading global investment firm. We aim to help endowments & foundations, pension plans, and private clients implement and manage custom investment portfolios that generate outperformance so they can maximize their impact on the world. Working alongside its early clients, among them leading university endowments, the firm pioneered the strategy of high-equity orientation and broad diversification, which since the 1980s has been a primary driver of performance for institutional investors. Cambridge Associates delivers a range of services, including outsourced CIO, non-discretionary portfolio management, staff extension, and asset class mandates.
Cambridge Associates maintains offices in Boston; Arlington, VA; Beijing; Dallas; London; Menlo Park, CA; New York; San Francisco; Singapore; Sydney; and Toronto. Cambridge Associates consists of five global investment consulting affiliates that are all under common ownership and control. For more information, please visit www.cambridgeassociates.com.