What is Alternative Risk Premia and Why are Investors Excited About It?

Goldman Sachs Exchanges

Julia McGonagle

Business

4.4 • 1K Ratings

🗓️ 10 June 2019

⏱️ 37 minutes

🔗️ Recording | iTunes | RSS

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Summary

While systematic investing has origins in academia dating back to the 1950s, only in the past several years has it evolved into practical applications for portfolio construction. In this episode, Heather Shemilt and Tom Leake of the Goldman Sachs Securities Division explain how ARP strategies work and the diversification and customization benefits they offer investors. "Alternative risk premia, or ARP, are long/short strategies that are designed to generate positive returns in exchange for an investor taking risk," Shemilt explains. "These strategies are seeking to provide persistent exposure to these factors or risk premia, such as carry value or momentum...What's interesting is that ARP can be systematically harvested across all of the asset classes." Also in the episode, they discuss how the ARP industry will continue to evolve, including the impact of big data, AI and machine learning on these strategies, with Leake acknowledging adoption of these technologies is still in "early days." This podcast was recorded on May 15, 2019. All price references and market forecasts correspond to the date of this recording. This podcast should not be copied, distributed, published or reproduced, in whole or in part. The information contained in this podcast does not constitute research or a recommendation from any Goldman Sachs entity to the listener. Neither Goldman Sachs nor any of its affiliates makes any representation or warranty, as to the accuracy or completeness of the statements or any information contained in this podcast and any liability therefor (including in respect of direct, indirect or consequential loss or damage) is expressly disclaimed. The views expressed in this podcast are not necessarily those of Goldman Sachs, and Goldman Sachs is not providing any financial, economic, legal, accounting or tax advice or recommendations in this podcast. In addition, the receipt of this podcast by any listener is not to be taken as constituting the giving of investment advice by Goldman Sachs to that listener, nor to constitute such person a client of any Goldman Sachs entity. Copyright 2019 Goldman Sachs & Co. LLC. All rights reserved.

Transcript

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0:00.0	This is Exchanges of Goldman Sachs, we discuss developments currently shaping markets, industries in the global economy.
0:13.8	I'm Jake Stewart, global head of corporate communications here at the firm.
0:17.0	In today's episode we're exploring the question, what is alternative risk
0:21.2	premium and why exactly are investors excited about it.
0:25.7	To answer that we're joined by Heather Schrammelt and Tom Leak.
0:28.7	Heather is head of systematic trading strategies distribution in the Americas and head of the strategic cross
0:34.6	asset solutions team. Tom is global head of the systematic trading strategies
0:38.5	sales strat team and is based in London. Heather and Tom welcome to the
0:41.7	program. Thank you. So Heather let's start by defining what we mean exactly by alternative risk
0:46.5	premium or ARP. What's the difference between ARP and Smart Beta which is another term we
0:52.0	you're throwing around a lot.
0:54.0	Thanks, Jake. It's great to be here. It's a real pleasure to be talking about
0:57.2	alternative risk premium. So with regards to the definitions, I think actually it makes
1:01.6	sense to start with Smart Beta. in actual fact what I'd say is smart beta is the perfect name
1:07.7	because simply it's about
1:10.4	Getting smarter or better exposure to the betas that you want in your portfolio.
1:16.0	More specifically, smart beta are long-only strategies that are designed to outperform a traditional beta in your portfolio.
1:25.0	So as an example, the S&P 500,
1:28.0	by tilting going overweight or underweight
1:32.0	that benchmarks constituents.
1:34.4	So with our S&P 500 example going over or underweight the stocks in the S&P 500
1:41.2	by some characteristic or factor such as carry value or momentum.
	...

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