Performance notwithstanding, even worse for asset owners was the inability of these strategies in 2018 to provide promised diversification from traditional stocks and bonds within institutional portfolios, said Jeremy Bryant, senior vice president and leader of the research team at MJ Hudson Allenbridge Holdings Ltd., London.
Senior executives from some of the institutional alternative risk premium firms interviewed said their teams are actively engaging with investors, explaining why their strategies performed as they did last year and why they still are relevant to existing investors.
That conversation involves reminding investors that "ARP is not a volatility hedge. It's a great diversifying strategy that's defensive in nature. The return experience in 2018 was good because it helped to reset investor expectations," said Anthony Lawler, co-head and portfolio manager at GAM Systematic, the London-based alternative risk premium business of GAM Holding AG, Zurich, Switzerland.
Mr. Lawler said GAM's team has had numerous conversations with investors since the fourth quarter last year "explaining why 2018 was a challenging year and stressing the long-term diversification benefits of alternative risk premia. We've been showing investors our research, which found that nothing that happened in 2018 was specifically tied to ARP, but rather was the result of two significant drawdowns that resulted in high correlation and no positive returns."
GAM Systematic managed a total of $1.7 billion in alternative risk premium strategies of which $1.65 billion was managed for asset owners' alternative risk premium strategies as of Dec. 31. GAM Holdings managed $134.7 billion as of the same date.
Consultants and other managers also stressed the need for investors to manage their expectations and to remind themselves that alternative risk premium strategies won't produce positive returns every year but do provide portfolio diversification over longer time periods.
"The Holy Grail for alternative risk premia strategies is a positive expected return with negative correlation to risk assets (stocks and bonds) to diversify your portfolio in all markets. But that goal is like a unicorn, it doesn't exist. ARP strategies were hurt in 2018 and didn't provide diversification," said Christopher Solarz, managing director and head of global macro hedge fund strategies in the New York office of alternative investment consultant Cliffwater LLC.
Noted Christopher Walvoord, partner and global head of hedge fund research at Aon Hewitt Investment Consulting Inc., Chicago: "2018 was a difficult year, which helped to differentiate between alternative risk premia managers. A little bit of volatility helps to concentrate attention on the quality of your manager's strategy."
Most of the managers interviewed for this story declined to provide investment returns for their alternative risk premium strategies upon request.
However, investment consultants said a few alternative risk premium managers exited 2018 with positive returns from their strategies, including some of the managers with the highest levels of institutional assets, but declined to name them.
In its first deep dive into the universe of the most institutional alternative risk premium managers, Pensions & Investments found that AQR Capital Management LLC, Greenwich, Conn., topped the list of firms managing the most in alternative risk premium strategies for asset owners as of Dec. 31.
AQR managed $53.3 billion for asset owners, from a total of $56.1 billion in alternative risk premium strategies.
As of the same date, Man Group managed $10.6 billion for institutional investors from total of $11.7 billion managed in alternative risk premium strategies. Goldman Sachs Asset Management, New York, followed with a $7.3 billion managed in alternative risk premium strategies for asset owners from a total of $13.5 billion.
The 15 firms identified by consultants as managing the most in alternative risk premium strategies for institutional investors worldwide ran a total of $100.9 billion as of Dec. 31. Total assets managed worldwide in alternative risk premium assets by P&I's universe was $121.9 billion.
Assets managed for asset owners worldwide by P&I's alternative risk premium manager group represents a large proportion of the $150 billion to $200 billion estimated to be invested in all alternative risk premium strategies globally as of Dec. 31, showed research from MJ Hudson Allenbridge.