When Lars Jaeger, head of alternative risk premia at GAM Investments, pioneered risk premia investing in 2004 it was seen as provocative and revolutionary. Many believed that the returns generated by hedge funds were alpha, and hedge fund managers were marketing them as such. Jaeger and his team, however, thought that hedge fund returns were risk premia and not alpha.

Fast forward 14 years. Alternative risk premia investing has caught on among leading institutional investors and global fund managers as they push to enhance returns while minimizing costs. The most recent proof that alternative risk premia investing is coming of age is a mandate to invest A$135 million (US$100 million) in GAM's Systematic Alternative Risk Premia strategy announced by AMP Capital on 13 June 2018.

GAM Systematic's Alternative Risk Premia portfolios typically target around 15 risk premia strategies across the style categories of value, momentum and carry. The team, led by Jaeger, uses a disciplined process to design, systematically implement and trade the risk premia. It runs the segregated mandate with a 10% volatility. Blackrock, Pimco and Man Investments have embraced risk premia investing.

In an interview with The Asset, Jaeger says: "When we started alternative risk premia one of our starting points was investing the returns of hedge funds. We realized that large parts of hedge fund returns are based on risk premia, on extracting the risk premia in global capital markets, and we coined the term alternative beta."

Jaeger started modelling ways of capturing risk premia and began his first alternative beta fund in 2004. "What started in 2004 was this idea. Now it has become a global industry with billions of dollars flowing into it. We were happy and proud of that. But it took people a long time to understand where hedge fund returns are coming from and why risk premia are attractive for investors," Jaeger says. Alternative risk premia investing offers the same opportunities as hedge funds, the same attractive returns that are uncorrelated to equities and bonds, and a good diversification vehicle. "People invest a lot of money in hedge funds, they pay huge fees, ridiculously high fees for it while here is an offering that gets them the same thing for much lower fees. In other words, significantly higher net returns," Jaeger says of his alternative risk premia strategy.

Alternative risk premia investing stayed under the radar until a decade later when poor hedge fund performance amid difficult market conditions became obvious. "In 2013 to 2014 we observed that some asset allocators started discovering risk premia independent of hedge funds as a new way to extract returns. It was the Canadian pension fund plus the sophisticated Scandinavian or Dutch pension funds that started on the ways of extracting risk premia. Some had been doing it for a long time before us, so it was not such a new thing. And that triggered a renaissance of the idea," Jaeger adds.

When asked about the risk of investing in an alternative risk premia strategy, Jaeger replies: "The risk of the alternative risk premia portfolio roughly stands at a volatility of 4%, the draw down potential. I would be surprised if we draw down more than 7-8% in any market for that volatility target. It is a low volatility, low-risk strategy."

In the equity downturn of January-February 2016, GAM's alternative risk premia strategy was up 3%. In the downturn of February 2018, the fund slipped 1.5%. "It does not move strongly with markets because of the inherent diversification. You have 15 different strategies. Each has a distinct return and performance driver. One might lose but another gains. The inherent diversification is robust," Jaeger says.