Style Premia: Are They Still Relevant?

In the 2018-2020 period, value stocks lagged, momentum cracked, and several high-profile style-premia funds bled assets. Yet two decades of live evidence show that some of the best-known premia like the momentum, carry, low-risk and volatility-linked trades still deliver attractive risk-adjusted returns across equities, bonds, FX and commodities, especially if combined thoughtfully in a broadly diversified portfolio, while exposures are timed skillfully and the implementation (e.g., via swaps) allows for leverage and flexibility.

FX value and size, however, have lost relevance recently. After updating the cross-asset data through March 2025, we explain why equity value now looks compelling, why FX value does not, and how combining the volatility-risk-premium (VRP) with a tail-hedge improves payoff symmetry.

We finish with a forward-looking multi-factor, low-beta portfolio targeting ≈10 % excess return, 8 % volatility and a Sharpe ratio near 1.3 before management fees.

Cross-asset evidence (2005 – Mar 2025)

All return and Sharpe ratio figures in the table are beta-adjusted:

• Equity premia use the Fama-French global long-short factors (WML-Momentum, HML-Value, SMB-Size, BAB-Low Beta) that are market neutral by construction.

• Bond and commodity sleeves come from the AQR “Century of Trend” and curve-carry research data sets, which are duration- or dollar-neutral.

• FX premia rely on Bloomberg/S&P G10 style-premia indices (FX Carry, FX Momentum) that are zero-net-currency, as well as PPP-based FX-Value baskets.

• Volatility premia use CBOE strategy indices (PUT for equity VRP, VXTH for tail-hedge), Barclays Swaption VRP for rates, and the S&P 500 Dispersion Index for long-gamma.

Because each series is already hedged for its native market exposure (equity beta, duration, currency delta) the numbers in the table represent pure style returns, not disguised market bets.

Together, the data provide a wealth of evidence that certain premia — price-trend, low-beta, carry and volatility-risk-premium — deliver persistent, positive information ratios across multiple asset classes. Behavioral and structural explanations include:

• Risk compensation: investors dislike negative skew (VRP), duration-short positions (curve-carry) or momentum crashes, so they demand a premium.

• Behavioral biases: under-reaction and herding produce momentum; over-reaction and glamour chasing create value spreads.

• Structural supply: corporations, insurers and macro funds systematically supply dividends, high-yielding currencies or option insurance, leaving excess returns for disciplined systematic buyers.

These structural and behavioral foundations explain why, even after the risk-premia unwind of 2018-20, the core premia in the table continue to post robust Sharpe ratios and remain relevant building blocks for alternative diversified portfolios.

FX Value: Diminished Relevance

PPP-based value baskets earned healthy Sharpe ratios pre-2010 but have been almost flat since 2017. Structural rate differentials and capital flows now swamp valuation gaps, and FX value overlaps heavily with FX carry (ρ ≈ 0.45). With muted pay-off and little diversification benefit, the sleeve is excluded from further investigation.

Equity Value: Renewed Opportunity

The global value-spread is wider than 90 % of history (per end of 2024) as indicated by research from various managers like GMO, AQR or Research Affiliates, implying a forward excess return near 5–6 % and a SR ≈ 0.55 if it merely mean-reverts halfway. The factor’s –0.3 correlation to stock-momentum and near-zero beta raise potential portfolio return while lowering risk, justifying an inclusion. Historically, Equity Value has delivered only 2.1% p.a. over 20 years, but in an effort for forward-looking optimization, it was included in the example portfolio presented below. The inclusion of Equity Value allowed for improving the Sharpe ratio by 0.07 and expected excess return by 0.6% p.a.

VRP with Tail-Hedge

Short-volatility reliably captures the gap between implied and realized vol, but carries crash risk. Allocating 10 % of risk to VRP and 4 % to a tail overlay (VIX calls, receiver swaptions) preserves ~90 % of VRP’s carry while halving crash draw-downs, pushing portfolio skew close to zero.

Proposed Example Portfolio – Sleeve Mix, Characteristics, and Role

The sleeve mix that follows is built with a top-down risk-parity framework rather than capital weights. Each factor sleeve is first scaled to a 10 % annualised volatility target (using long-term covariance for multi-asset trend, 30-day ATM vols for options, etc.). We then allocate risk-budget shares according to three rules:

1. Sharpe-weighted but capped – higher-quality / robustness premia (trend, BAB, VRP) get more risk, but no sleeve may exceed 25 % of ex-ante VAR.

2. Correlation balance – risk is trimmed where pair-wise correlations are > 0.4 (e.g., between FX-carry and equity VRP) and added where correlations are negative (trend vs. carry, BAB vs. VRP).

3. Crash-robustness – one “convex” sleeve (tail-hedge, dispersion or trend) must offset every concave sleeve (VRP, carry).

The resulting weights target 8 % portfolio volatility and hold gross futures/option notional around three times NAV, well inside standard margin limits. A quarterly rebalance resets sleeves to target vol and risk shares; intra-quarter, sleeves are volatility-managed but not correlation-optimised (to control turnover). 

With those design choices, the portfolio achieves an ex-ante equity beta of roughly +0.10, and a 99 % stress loss (2008 replica) of ≈ –8 %, small enough to be financed without forced deleveraging.

Expected five-year statistics (gross of fees)

• Excess return ≈ 10 % p.a.

• Volatility ≈ 8 %

• Sharpe ratio ≈ 1.30

• Equity-beta ≈ +0.10

Conclusion

The 2018-2020 alternative risk-premia unwind was an implementation crash and not the death sentence of alternative premia. It proved that excessive leverage and crowding matter​. But it did not invalidate the premia themselves.

Momentum, carry, low-risk, and volatility premia still offer persistent, cross-asset edges. Add the once-again compelling equity-value factor, pair pro-cyclical sleeves (carry, VRP) with defensive ones (trend, BAB, tail-hedge), keep leverage sober, and the result is a portfolio that aims for double-digit returns with single-digit risk — while barely leaning on the direction of the broad market.

Style premia aren’t dead; they just demand better craftsmanship. Disciplined construction, skillful exposure timing, broad diversification and a flexible implementation structure is what turns style premia into durable and attractive portfolios.