Alternative Risk Premia (ARP) return dispersion continues in April

Alternative risk premia accessed through total return swaps continue to show wide dispersion across asset classes and styles. While these long/short strategies are generally believed to be low volatility factor exposures, there can be wide differences in return when there are large focused shocks to financial markets. The last 12 years have been relatively stable and has not represented a full business or financial cycle. Extrapolating from this stable period would have given investors a false sense of security. 

Short volatility focused strategies have seen sharp declines consistent with a volatility spike. Value and size ARP have done poorly during this downturn. Similarly, commodity carry has done well given the huge demand and supply shock to the oil markets. These targeted ARPs may provide good focused return if you are on the right side of a shock, but that requires prediction and dynamic adjustments. For investors that want an uncorrelated set of exposures to market beta, a diversified approach albeit adjusted for risk and market regimes is a better play.