Finding Alternative Investments Resistant to Stock and Bond Crashes

Which alternative risk premiums (ARP) protect against stock and bond market crashes via return correlations/betas that remain low during such events? In their May 2023 paper entitled “Does Alternative Risk Premia Diversify? New Evidence for the Post-Pandemic Era”, Antti Suhonen and Kari Vatanen employ recent data to re-examine ARP risk and diversification properties, focusing on drawdown intervals for stocks and bonds. They categorize ARP strategies as offensive (risk-on) or defensive (risk-off) based on respective equity market interactions. For robustness, they consider several drawdown metrics. Using weekly data for 27 “pure” factors spanning five asset classes (commodity, credit, equity, fixed income and currency exchange) and 10 ARP strategies (backwardation, carry, congestion, low volatility, momentum, quality, size, trend, value and volatility) from PremiaLab during January 2007 through mid-October 2022, they find that:

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