Business Cycle–Related Timing of Alternative Risk Premia Strategies

Abstract

Time variation in risk premia is not a violation of market efficiency but rather a reflection of time-varying economic rewards. By analyzing macroeconomic sensitivities (proxying for good and bad times), the authors show that time-varying returns of certain alternative risk premia strategies are significantly related to economic conditions. On the basis of identified return patterns, the authors construct a risk premia timing strategy that adds statistically significant marginal performance with low turnover. They confront data mining concerns by successfully cross validating their model across various investment universes.

TOPICS: Analysis of individual factors/risk premia, real assets/alternative investments/private equity

Key Findings

• • The authors show that the returns of certain alternative risk premia strategies are statistically significant related to economic conditions.

• • Evidence provided give no indication that the documented performance patterns are driven by underlying beta exposure.

• • Given the observed macroeconomic sensitivities the authors construct a risk premia timing strategy that add marginal performance with low turnover to a risk-parity portfolio.