Practical Applications of Alternative Risk Premia: Is the Selection Process Important?

Practical Applications Summary

In Alternative Risk Premia: Is the Selection Process Important?, from the Summer 2019 issue of The Journal of Wealth Management, authors Francesc Naya (of BDK Financial Group in Lisbon, Portugal) and Nils S. Tuchschmid (of the University of Applied Sciences and Arts, in Fribourg, Switzerland) examine the necessity of having a due diligence process for alternative risk premia decisions. The authors first analyze alternative risk premia indexes in categories used by providers to determine differences in performance. They find significant degrees of heterogeneity in most indexes that a priori capture the same risk premium, indicating that results are highly provider-dependent, and thus that the selection of a provider is important. The authors also determine the presence and extent of overfitting bias in the alternative risk premia industry.