Institutional investors embrace risk premia and eye diversification benefits

Investing on the basis of risk premia rather than asset class performance is being embraced by pension funds, sovereign wealth funds and other institutional investors. The trend is especially popular among Scandinavia’s pension funds, but what are these premia and will the concept trickle down to retail?

Three things happen when you ask the creators of indexes or products about risk premia. First, this third generation investment philosophy is defined in terms of its relationship with alternative (and sometimes ‘smart') beta. Second, there is a promise to send vast swathes of research and academic papers - a vow that is generally met. Third, each one has an example of how their slight tweak to the concept has made them a market leader.

"A risk factor, in the most general sense, is something that