Using A Factors-First Lens To Find Opportunities In Today’s Alternatives Market

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A factors-first approach reveals how traditional asset allocation can mask a portfolio’s risk exposures. For example, even though the average endowment has more than 50% of its portfolio allocated to alternatives, equity risk accounts for 95% of the total risk while idiosyncratic risk accounts for less than 4%, according to our analysis. Our research explores this factors-first concept by examining how risk-factor exposures and the income-generating characteristics of alternatives have evolved through the pandemic and recovery. Nuveen experts also share their perspectives on where they are finding the most attractive relative value opportunities as we transition into an environment of rising interest rates and increasing inflation concerns. 

A risk factor-based approach for portfolio optimization allows institutional investors a much deeper understanding of risk and whether they are being compensated for owning those risks. This paper examines rates duration, credit, equity and idiosyncratic as risk factors and considers the degrees of exposure offered by the alternative sectors of fixed income, private credit, real assets and real estate.  

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