STRATEGY SPOTLIGHT
May 2017
AUTHORS
Josh Davis
Portfolio Manager
Quantitative Strategies
PIMCO᾽s Multi-Asset Alternative Risk
Premia Strategy: The Search for Returns
Beyond Traditional Asset Classes
Many investors look to alternative risk premia strategies
for attractive returns and diversification benefits within
their overall asset allocation. In contrast, many see
valuations for traditional assets as stretched and have been
disappointed by inconsistent hedge fund performance. As
portfolio managers Josh Davis, Matt Dorsten and Graham
Rennison explain, PIMCO’s Multi-Asset Alternative Risk
Premia Strategy provides an efficient way to gain exposure
to a diversified suite of alternative risk premia.
Q: What is PIMCO's Multi-Asset Alternative Risk Premia Strategy (MAARS)?
Matt Dorsten
Portfolio Manager
Quantitative Strategies
Graham Rennison
Portfolio Manager
Quantitative Strategies
Davis: MAARS features a collection of well-known alternative risk premia strategies, such as value,
carry, momentum and risk aversion, sourced across all major asset classes, including equities, rates,
commodities and currencies. It is designed to be a true alternative: Unlike most of our peers, we
control equity beta and duration at the underlying strategy and portfolio levels to ensure consistent
diversification. We also follow a dynamic approach to risk allocation and employ valuation-based
tilts, rather than the static risk-allocation approach used by most of our competitors.
PIMCO has deployed alternative risk premia strategies since the 1980s in a variety of hedge funds
and other actively managed portfolios. We refer to them as “structural alpha,” and have written
extensively about their use in our portfolios. (See "The Secret of Active Portfolio Management" by
Mihir P. Worah and Ravi K. Mattu.) Along with top-down macro and bottom-up security
selection, alternative risk premia have been a key driver of our alpha.
In short, MAARS is new, but the underlying strategies are not. MAARS combines these strategies,
providing investors access to our best ideas in alternative risk premia in one efficient and
comprehensive package.
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May 2017 Strategy Spotlight
Q: Why are investors embracing these strategies?
Dorsten: Alternative risk premia are getting mainstream attention
because they can potentially deliver a meaningful boost to returns
and provide portfolio diversification. With bond yields near
historical lows and equities fully valued, investors globally are
concerned that traditional asset returns are likely to underwhelm.
Many see a widening gap between their official return targets and
what they think markets are priced to deliver.
Alternative risk premia strategies are ideal for this environment as
they can help bridge the gap without forcing investors to pay high
fees or sacrifice liquidity. Moreover, as these strategies are long/
short and have no directional exposures to any asset class on a
systematic basis, they potentially are also highly diversifying.
Q What is different about PIMCO MAARS?
Rennison: We think MAARS is a differentiated strategy that is quite
complementary to those managed by some of our peers. In part, this
is because MAARS, in several aspects, goes beyond the traditional
premia associated with value, carry, momentum and volatility:
First, we are highly selective. We only include risk premia that have
been proven to exist across multiple business cycles, possess a clear
economic rationale, and are affirmed by extensive academic research.
Another key consideration is liquidity. Every strategy in our
opportunity set is tradable using highly liquid or exchange-traded
instruments. We think selectivity is important, as these risk premia
exist across most asset classes but not everywhere. We believe a
“kitchen sink” approach, which allocates to every alternative risk
premium without stringent screening criteria, is dangerous.
Second, our strategy suite is complementary. We emphasize our
strength in fixed income, currencies and commodities by investing
the bulk of the risk in non-equity-based alternative risk premia. In
contrast, equity-based risk premia seem to dominate portfolio risk
in strategies managed by many of our peers, with some allocating
as much as 70% of the risk to equity-based strategies. In our view, a
balanced allocation among risk premia, where no single asset class
or premium dominates, is prudent, both from a return as well as a
risk perspective.
Third, we have designed each strategy to seek near-zero
correlations to both stock and bond markets by hedging out
exposures to these markets at the strategy level. Despite the costs
associated with hedging, we think this is critical to live up to the
“alternative” label. In addition, we don’t want our strategy to
depend on historical correlations among risk premia remaining
steady for diversification benefits to be realized.
Finally, and what I think really sets us apart, is the attention to
detail we have paid to strategy construction. As Josh pointed out,
PIMCO has implemented and enhanced these strategies across a
range of products for several decades. We think robustness of
construction will play a big role when market conditions become
less conducive. Strategies based simply on backtests without actual
trading experience will find it hard to catch up.
Q: Why do you believe PIMCO has an edge in strategy design
and implementation?
Dorsten: While managers may refer to the same risk premia,
investors conducting due diligence will quickly discover that both
strategy construction and implementation vary significantly
across managers. Indeed, there is no industry consensus yet on
the definitions of some of these risk premia, let alone how to
capture them. This is likely to lead to significant dispersion in
outcomes, which indeed has been the case thus far.
In designing our strategies, we have the benefit of years of experience
and insights from across our entire investment platform. Our team
of quantitative researchers, working closely with PIMCO’s global
macro and sector specialists, has refined these strategies over time,
further improving our models and implementation.
Execution also is key as these strategies are dynamic and frequent
trading is necessary. PIMCO's size and product diversity
potentially give us a sustainable “terms of trade” advantage in the
form of the lowest possible execution costs. Furthermore, the
broader trade flow at PIMCO allows us to mask our systematicstrategy trade flow, preventing trading counterparties from
gaining implicit insight into our trading models.
Q: How are investors using these strategies?
Rennison: Two key themes seem to dominate. One is a focus on
seeking higher returns by allocating to alternative risk premia
strategies that target volatilities in the high single digits or greater.
We anticipate these strategies will deliver meaningfully higher
returns than those provided by traditional stocks and bonds.
As Matt highlighted earlier, we also see clients turning to these
strategies as a source of portfolio diversification. Given these
strategies are constructed using long/short portfolios that explicitly
target market neutrality, we expect they will have low correlations
with both equities and fixed income markets. This stands in
contrast with many of our peers, whose strategies often convey
significant equity beta, often accompanied by bond duration, and
are therefore not a true alternative approach. For these reasons,
some investors are using these strategies as an “enhanced
diversifier” to complement core fixed income allocations.
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