|Systematic Risk Premia Across Asset Classes|
|24 February, 2012|
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As participation in the capital markets has increased, and enhanced information flow has intensified the interdependence of various asset classes and geographies, investors have been seeking new sources of uncorrelated returns. Non-traditional asset classes or fund structures—in particular, emerging markets, commodities, real estate, private equity and hedge funds—are now regularly included in the asset allocation mix. Increasingly, investors consider systematic strategies and factor indices across asset classes as additional elements of the investment universe, capable of providing a unique source of diversification and returns. While benchmark indexing has guided investments in equities, bonds and largely in emerging markets and commodities, systematic strategies across asset classes are often approached on a stand-alone and ad hoc basis.
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This commoditisation of systematic sources of return has a relatively long history in equity investing. Since the publication of the seminal paper on common factors in equity returns by Fama and French in 1993, equity investors have been aware of factor-based approaches that reflect either systematic exposures to themes such as valuation (as measured, for example, by book-to-market ratios), quality (as measured, for example, by the stability of earnings and dividend policies), size (as measured by market capitalisation), momentum (as measured by relative past price performance), or risk anomalies (as measured by the outperformance of low-risk portfolios, compared to high-risk portfolios). See, for example, Melas, D., and Kang, X., 2010, for a discussion of the application of systematic equity indices in the investment process.