Why CIC is hesitant over alt risk premia strategies

The sovereign wealth fund agrees that alternative risk premia strategies have their own merits, but is staying away from them despite years of active consideration.
Why CIC is hesitant over alt risk premia strategies

China Investment Corporation (CIC) is still assessing whether to begin using of alternative risk premia (ARP) strategies in its portfolio but has yet to reach a conclusion after years of consideration. However, the sovereign wealth fund believes such strategies do have some appeal.

"We're not using them [ARP strategies]. We started looking at them several years ago but still have not invested in them....we're still considering but should need quite a long time,” a senior investment executive at the $1.05 trillion sovereign wealth fund, told AsianInvestor.

ARP seeks market neutral exposure, by using long and short exposure to traditional risk factors, such as value, momentum or volatility. They typically invest across asset classes such as equities, commodities, fixed income and currencies.

"My understanding is this product has its own advantages, but it's difficult to employ it on a large scale, and it has a higher demand on investors' understanding as it is not transparent," the CIC executive added. "The theory or back-test of alternative risk premia are very good. But whether it is really that good [when it comes to] real investments, we don't understand it very much."

CIC typically allocates its portfolio and has teams of professionals focus on particular asset areas, for example equities, fixed income, commodities. It then increases allocations in assets that are expected to outperform in the coming years.

This can make ARP strategies a difficult fit due to the fact they allocate according to different risk premia, such as momentum or volatility, and are not based on a particular asset class, the executive said.

ARP-based investing is a more flexible strategy than CIC's approach, which makes it interesting, but it also means that it does not fit into its broader asset allocation framework, he added.

Nevertheless, ARP strategies, which are more popular in the US and Europe relative to Asia, did help some asset owners to protect against market volatility during 2020. ARP mandates that were specifically designed to be defensive have done better than other ARP strategies, said Matt Talbert, senior investment manager at the Teacher Retirement System of Texas, which has $160 billion under management.

“This is one of the benefits of customised mandates with broker dealers, in which you can embed more explicitly defensive structures,” he said, pointing to the use of put options to create a stop loss or an explicit equity tail hedge. “That has served a lot of folks well in the first quarter of this year.”


ARP strategies are often likened to those used by some hedge funds. As a result, providers often market them as cheaper and more transparent solutions than hedge funds, that charge less fees and offer comparable returns.

ARP annual fees typically range between 0.5% and 1%, whereas hedge funds often charge a 1.5% to 2% management fee and a 15% to 20% incentive fee.

ARP strategies can also help investors build more diversified portfolios, something that asset owners are striving to do as a result of the Covid pandemic.

“An advantage of the long-short investment approach employed in alternative risk premia strategies is that it allows investors to isolate the exposure to a factor from the underlying traditional asset class exposures, which enhances diversification in a broader portfolio context,” Albert Chuang, portfolio manager for quantitative beta strategies at JP Morgan Asset Management, told AsianInvestor.

These benefits have not yet been enough to convince CIC to adapt to accomodate such strategies. The executive noted that the sovereign wealth fund has allocations in hedge funds and that they have delivered satisfactory investment returns, and that it sees hedge funds as a good enough diversifier. Those are other reasons why the interest in ARP is not particularly high, he added.

Added to this, some investors have suffered heavy losses on some ARP strategies, have led them to grow increasingly sceptical of such investments. Such tales are unlikely to ease CIC's mind to try them out.

Hedge fund performances for the year vary, but 155 multi-strategy hedge funds with a combined $252 billion in assets reported an average return of 0.5% in the year to end-October, according to fund of hedge funds manager Aurum.

In addition, while ARPs are more transparent than hedge funds, they are far from an open book. The funds involve a lot of over-the-counter investment tools in the transactions; for instance, the "defensive" tool that Teacher Retirement System of Texas employed has used a lot of derivatives like options, so it can make a return when the market is volatile, said the unnamed executive.

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