Abstract

The authors propose portfolios comprising simple and intuitive risk premiums (exotic betas) that are transparent and cost effective, perform well in different market environments, and are uncorrelated with equities. They are an alternative to traditional portfolios that are defined by their asset class allocations. The authors show that exotic beta investing offers a better risk–return profile than risk parity and hedge fund replication and that adjusting exposures to capture variation in risk premiums further improves performance.

About the Author(s)

Mark Carhart CFA
Ui-Wing Cheah
Giorgio De Santis
Harry Farrell
Robert Litterman PHD

Robert B. Litterman is a founding partner and chair of the risk committee at Kepos Capital, a systematic global macro firm. Previously, he served in research, risk management, investment, and thought leadership roles at Goldman Sachs & Co., where he also oversaw the Quantitative Investment Strategies group in the asset management division. Dr. Litterman also served as one of three external advisers to Singapore's Government Investment Corporation. He was named a partner of Goldman Sachs and became head of the firm-wide risk function and also served as co-head of the fixed-income research and model development group with Fischer Black. Dr. Litterman has published a number of groundbreaking papers in asset allocation and risk management and is the co-developer of the Black Litterman global asset allocation model, a key tool in investment management. He has coauthored several books, including The Practice of Risk Management and Modern Investment Management: An Equilibrium Approach. Dr. Litterman serves on a number of boards, including Commonfund, the Options Clearing Corporation, Resources for the Future, the Robert Wood Johnson Foundation, the Alfred P. Sloan Foundation, and the World Wildlife Fund. He holds a BS in human biology from Stanford University and a PhD in economics from the University of Minnesota.

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