The second is a point of challenge around trading frequency and therefore costs embedded in ARP strategies.
To mitigate the risk of excessive costs, we trade only the most liquid assets, such as index futures, liquid currencies and broad market derivatives, rather than more expensive assets like single stocks.
It’s crucial to note there are both buy and sell signals. What this means is that overall, most strategies aim to be market neutral.
For example, a fixed-income carry strategy that pairs an equal number of long (or buy) signals in high-carry markets with short (or sell) signals in low-carry markets will have minimal duration exposure on average over time, while the desired carry factor is extracted.
We believe this beta-neutral aspect makes APR strategies attractive diversifiers alongside a traditional portfolio, as we know we are not loading heavily onto existing risks.
The exception to this rule is often momentum strategies, most of which by design do swing between overall long and short positions as markets move up and down.
Here we try to capture the animal spirits that drive Fomo and Tina in a systematic, emotionally detached way. In recent years we’ve found momentum strategies most difficult to work with and integrate into our broader multi-asset portfolios.
As we include ARP strategies into multi-asset portfolios, any variable beta exposure from them affects the overall exposure of portfolios in a more noticeable way, meaning holistic risk management considerations are all the more important.
Chris Teschmacher is a multi asset fund manager at LGIM