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Risk Premium Strategy

  • Asset Class Alternatives

Overview

The GMO Risk Premium Strategy seeks to generate a total return over the long term commensurate with that of global equity markets primarily by writing put options on U.S. and non-U.S. stock indices. 
GMO’s Global Equity team believes that put selling enables investors to generate equity-like returns in a manner that is relatively insensitive to equity market valuations and also that allocating across global markets increases the opportunity for adding value. Put sellers are compensated by collecting what amounts to an insurance premium. In contrast, equity owners are compensated by the earnings yield of the market. Since both activities take equity risk, utilizing both put selling and owning equities can achieve diversification via an increased opportunity set. Furthermore, the relative attractiveness of the approaches varies – selling puts is an attractive proposition when insurance premiums are high, while owning equities is attractive when earnings yields are high, and these do not have to be coincident. 
The team believes the use of the CBOE S&P 500 PutWrite Index is appropriate for measuring the Strategy’s ability to generate returns by gaining exposure to the global variance risk premium; however, we also consider performance against the MSCI World Index over long time horizons to evaluate the Strategy’s ability to harvest the global equity risk premium.

Facts

Performance

Management

Constable_Neil

Neil Constable

Head of Global Equity

Dr. Constable is the head of GMO’s Global Equity team. Previously at GMO, he was the head of quantitative research and engaged in portfolio management for the Global Equity team’s quantitative products. Prior to joining GMO in 2006, he was a quantitative researcher for State Street Global Markets and a post-doctoral fellow at MIT. Dr. Constable earned his B.S. in Physics from the University of Calgary, his Master’s in Mathematics from Cambridge University, and his Ph.D. in Physics from McGill University.

Documents

Literature

Fact Sheet
Product Primer
GIPS Compliant Presentation
GIPS Composite Descriptions
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Downloads

Performance
Portfolio Composition
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Commentary & Attribution

Commentary - Quarterly
Commentary - Annual
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Risks

Risks associated with investing in the Strategy may include Market Risk - Equities, Illiquidity Risk, Derivatives and Short Sales Risk, Management and Operational Risk, and Counterparty Risk.