Alternative risk premia (ARP) strategies can be divided into offensive and defensive categories. The offensive strategies will perform better in risk-on environment and defensive strategies will do better during risk-off environments. In other words, offensive strategies will do better when equities are higher while defensive strategies will do better in bond positive environments. There is more to holding ARPs than looking at the unconditional correlations.
The paper "Does Alternative Risk Premia Diversify? New Evidence for the Post-Pandemic Era" analyzes the value of a diversified pool of ARPs to show their value in the post pandemic period. It finds that trend and commodities do a very good job of providing defensive diversification.
The key finding is that all ARPs are not the same. A simple unconditional or linear approach to analyzing ARPs will miss the value-added in up and down-market environments. Of course, investors have to form a view on the future direction of the markets to fully take advantage of the conditional behavior in ARPs.
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