Strong first quarter returns for selected alternative risk premia
Selected alternative risk premia showed strong performance during the first quarter. There is significant tracking error with the HFR risk premium indices versus individual bank risk premia swaps, but they can provide some suggestive rankings. This strong performance should not be surprising given the large reversal of with equity beta and the strong moves in global bond markets. A couple of major themes emerged for the first quarter centered around positive equity beta risk and falling volatility.
Volatility strategies that do better when volatility is normalized after a spike performed well. Given the link between ARP performance and volatility, the declines since December were good for these indices. Concentrated risks in credit also did well as spreads declined significantly with the reversal in equity market risk. Carry strategies that are often correlated with equity market risk and volatility also performed well. Momentum long/short neutral strategies were hurt from rising short returns and rotation across sectors. Long-only momentum (smart beta strategies) performed better in the first quarter. A stable environment for the second quarter should allow risk premia strategies to generate further returns.