PT - JOURNAL ARTICLE AU - Jean-Michel Maeso AU - Lionel Martellini TI - Factor Investing and Risk Allocation: <em>From Traditional to Alternative Risk Premia Harvesting</em> AID - 10.3905/jai.2017.20.1.027 DP - 2017 Jun 30 TA - The Journal of Alternative Investments PG - 27--42 VI - 20 IP - 1 4099 - https://pm-research.com/content/20/1/27.short 4100 - https://pm-research.com/content/20/1/27.full AB - Sophisticated institutional investors have a growing interest in factor investing, a disciplined approach to portfolio management that is broadly meant to allow investors to harvest risk premia across and within asset classes through liquid and cost-efficient systematic strategies without having to invest with active managers. Although it is now well accepted that the average long-term performance of active mutual fund managers can to a large extent be replicated through a static exposure to traditional long-only risk premia, an outstanding question remains with respect to the best possible approach for harvesting alternative long–short risk premia.The focus of this article is to empirically analyze (1) whether systematic rules-based strategies based on investable versions of traditional and alternative factors allow for satisfactory in-sample and out-of-sample replication of hedge fund performance, and more generally (2) whether suitably designed risk allocation strategies may provide a cost-efficient way for investors to get attractive exposure to alternative factors, regardless of whether they can be regarded as proxies for any particular hedge fund strategy. The main findings can be summarized as follows. On one hand, the authors find that replication models for hedge funds strategies generally achieve a relatively low out-of-sample explanatory power, regardless of the set of factors and the methodologies used. On the other hand, they find that heuristic allocation strategies, such as risk parity strategies, applied to alternative risk factors could be a better alternative to hedge fund replication for efficiently harvesting alternative risk premia.TOPICS: Analysis of individual factors/risk premia, real assets/alternative investments/private equity, statistical methods, performance measurement