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Agenda
1. Risk Premia Strategies A Cross-Asset-Class Taxonomy 2. From Theory to Practice: Strategy Applications 3. Enhancing and Timing Risk Premia Strategies
Introduction
Risk premia strategies seek to capture excess compensation for taking exposure to risk factors beyond traditional market betas Expected to have positive excess returns over long horizons But experience sustained draw-downs when risks are realized We present a systematic framework for identifying and analyzing risk premia strategies across asset classes And we show how they can be combined into portfolios with attractive profiles
a lph A
Active
Ret rtfolio Po
ur ns
Alternative Beta
Tr ad
Simple, systematic strategies targeting established risk premia and common factors
it i on al
Passive 5
Be
ta
1
2. Regress to find factors Factor 1
2
Factor 2
3
Factor 3
Mom
EM
Arb
Identified Risk
Simple
Systematic
Established
Performance
Carry
FX carry, top 3 minus Investment currency bottom 3 of G10 by yield crash risk
Curve
Duration risk
Value
High minus low book-to- Short the call option in growth stocks market stocks
Long recent relative winners Commodity futures and short recent relative losers momentum Momentum
Reversal risk
Volatility
Short volatility strategies trying Short equity variance to capture realized implied swaps premium Long emerging market assets versus developed market equivalents Strategy between assets with prices that should converge in the future Long illiquid assets versus liquid ones with other similar properties Long EM money markets versus dollar
Arbitrage(1)
Liquidity
Liquidity collapse
___________________________ 1. Arbitrage is the conventional name given to these kinds of strategies (merger arbitrage, convertible arbitrage, cap-structure arbitrage) even though it is of course a misnomer, if not an a outright oxymoron, to call a risk premia strategy an arbitrage strategy. Source: Barclays Capital
Carry Equities Rates Currencies Credit Commodities Volatility Dividend Yield Short-Dated Eurodollar G10 FX Carry High Yield vs. High Grade Short Straddles/ Variance
Curve Term Premium Credit Term Premium Deferred vs. Nearby Volatility Term Structure
Value Book-toMarket Futures Mean Reversion PPP Value Ratings Value Scarcity/ Backwardation Implied vs. Realized
Arbitrage Merger Arbitrage Bonds vs. Futures NDF vs. Cash Negative Basis Physical vs. Futures Convertible Arbitrage
Each cell represents an individual strategy We consider volatility as an asset class (row) Blank cells do not necessarily indicate no strategy exists just that we havent thought of one yet!
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Commodities Curve: Long 3M deferred and short beta-weighted nearby futures on basket of 23 liquid commodities (supply shock risk)(1)
For accurate analysis we identify a subset of relatively easily modeled strategies Commodity Curve Barclays Capital Commodity Index ER
Curve
Term Premium
Value
Momentum 100%
50%
EM
Various
Arbitrage
Merger Arbitrage
Liquidity
Firm Size On-the-Run vs. Off-the-Run Debt Outstanding
Stock Momentum 0%
-50% Futures EM Money Bonds vs. 1999 2000 2001 2002 2003 2004 2005 2006 Futures 2007 2008 2009 2010 Momentum Markets
Rates Momentum: Long past one year winner and short loser from 2y, 5y, 10y and Long Bond futures, High Yield vs. Credit Term Ratings Value Credit duration-weighted(1) High Grade Premium
140%
EM FX Carry EM Credit
NDF vs. Cash Negative Basis Physical vs. Futures Convertible Arbitrage
Commodities 120%
100%
Rates Momentum
Volatility 80%
60% 40%
20% Restrict to implementations using liquid transparent instruments, avoid shorting cash 0% Static leverage (max 5x) is applied to achieve annual volatility around 10% -20% Strategies are in 1996 1998 unfunded excess2008 2010 format, net of estimated transaction costs USD in 2000 2002 2004 2006 return 1990 1992 1994
___________________________ 1. For ease of comparison, all graphical comparisons with respective traditional beta indices (S&P 500, etc.) are using excess return versions of those indices also statically scaled to an annual volatility around 10%. Source: Bloomberg, Barclays Capital
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Rates
___________________________ 1. Sharpe ratios shown for maximum available data set for each strategy. Asterisked (*) strategies start from January 1999 or later. Source: Barclays Capital
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Rates
___________________________ 1. Maximum drawdowns shown for maximum available data set for each strategy. Asterisked (*) strategies start from January 1999 or later. Source: Barclays Capital
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Full Period
Credit Crisis
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___________________________ 1. Traditional beta are the following: S&P 500 Index (SPTR including dividends) excess return over 1M USD Libor, Barclays Capital US Treasury Index excess return over 1M USD Libor, Barclays Capital Dollar Diversification Index excess return trade-weighted G10 currencies versus the dollar, Barclays Capital US Corporate Index excess return over duration matched treasuries, Barclays Capital Commodity Index (BCI) excess return and S&P 500 Short-Term VIX Futures Index inverse excess return (-1x daily) as short volatility beta. Source: Bloomberg, Barclays Capital.
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Curve
Value
Mom
EM
Arb
100% 80% 60%
Credit
20%
Comm
0%
Vol
-20% 1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
Equities Rates Currencies Credit Commod Volatility Ann. Exc. Return Ann. Sharpe Ratio Maximum Drawdown Correlation w/ traditional beta 3.6% 0.7 10% 2% 8.2% 1.3 11% 68% 4.0% 0.8 9% 19% 2.1% 0.2 23% 66% 14.8% 1.8 11% 28% 6.9% 1.0 19% 53%
Source: Barclays Capital. ___________________________ Note: For ease of comparison, graphical comparisons with respective traditional beta indices (S&P 500, etc.) are using excess return versions of those indices statically scaled to an annual volatility around 10%. In these examples, however, note that the portfolio of risk premia have volatilities lower than 10% since they benefit from diversification across strategies. Source: Barclays Capital
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Curve
Value
Mom
EM
Arb
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
Historical Performance
Carry Curve Value Ann. Exc. Return 5.2% Ann. Sharpe Ratio Maximum Drawdown
Source: Barclays Capital
Curve Value
1.0 11%
Momentum EM Arbitrage
Source: Barclays Capital
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Curve
Value
Mom
EM
Arb
120% 100%
+
Historical Performance
Carry Momentum 4.0% 0.7 10% Carry and Momentum Combined 4.6% 1.3 6% 5.2% 1.0 11%
0.6% 0.4% 0.2% 0.0% -0.2% -0.4% -17.1% -12.6% -8.2% -3.7% 0.8% 5.3%
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1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
20
0%
-50% 1991
1994
1997
2000
2003
2006
2009
___________________________ Note: See The G10 FX Carry Premium, 7 October 2010, Systematic Strategies Research for further details. Source: Barclays Capital
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Momentum
1
Q-BES
1
Q-GSP
Advanced EM
Q-MA
Rates
Exceed Family
TrendStar+
Targeted Exposure Targeted Exposure Value 2 Momentum 2 EM FX Momentum 3 Adaptive Trend ComBATS 6
Currencies
Value Convergence
EM FX Carry 3
Commods
Roll Yield
Backwardation Voyager
Volatility
Enhanced 3 BuyWrite
Q-VOLTAS
___________________________ 1. Q-BES and Q-GSP have value and momentum features, respectively, in their construction but included other factors (earnings surprise and earnings growth, respectively). 2. The Targeted Exposure Futures family of indices are available individually (2yr, 5yr, 10yr and Long Bond) and can be used to easily construct the simple value and simple momentum strategies described. The full family of Targeted Exposure Futures indices are directly tradable via the respective iPath exchange-traded notes. 3. EM FX Momentum, EM FX Carry and Enhanced Buy-Write strategies are currently in the process of being converted to official Barclays Capital Indices but are only available currently as custom strategies. Source: Barclays Capital
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Conclusions
Risk premia strategies combine appealing long-run performance with identifiable risk profiles and stable characteristics The Barclays Capital Risk Premia family is a systematic approach to identifying risk premia strategies across asset classes Portfolios benefit from diversification across asset classes and/or risk premia Enhancing and timing risk premia offer further potential to improve performance
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Further Information
Systematic Strategies Research Series
Barclays Capital Live Keyword: SYSPUBS
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