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Inflation Strikes Back: Should Alternative Risk Premia Investors Care?

As inflation soars to levels not seen in the past thirty years, what does this mean for alternative risk premia (ARP) investors? In this paper, we add to the sparse literature on inflation impacts on ARP by expanding the universe of ARP analysed. We observe outperformance by carry strategies and Equity Momentum in inflationary times, whereas mean-reverting macro directional strategies and Equity Low Risk seem to underperform. Meanwhile, we observe more muted impacts for other ARP. For a well-diversified ARP portfolio, the performance dispersion results in an overall subdued difference in performance between inflationary and non-inflationary periods, suggesting that inflation shocks should be seen more as a relative risk/opportunity than an absolute one for these liquid alternative strategies.

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