Alternative risk premia (ARP) strategies integrated with reference portfolios can achieve optimal total portfolio outcomes. This study shows how ARP overlays can complement decentralized investment management models and benefit plan constituents.
Overview
Alternative Risk Premia (ARP) strategies have traditionally been sold as stand-alone products to complement a reference portfolio. We illustrate how ARP can be integrated with a reference portfolio to achieve optimal total portfolio outcomes. From 1931 to 2020, a factor diversifying overlay reduces the risk of the reference portfolio and captures a welfare enhancing diversification premium. The relaxation of the risk budget enhances the fund Sharpe ratios through strategic factor tilts and by levering existing asset class or active management exposures. We provide a modular framework illustrating how ARP overlays may complement the decentralized investment management model to benefit plan constituents.