Risk premia harvesting: capturing multiple systematic return sources across asset classes
Risk premia harvesting is a systematic investment approach that seeks to capture multiple well-documented, theoretically grounded sources of excess return—risk premia—across a broad range of asset classes simultaneously. Rather than concentrating on equity beta or a single factor, a risk premia harvesting strategy holds diversified exposure to carry, value, momentum, trend, and quality signals across equities, bonds, currencies, and commodities. The approach is grounded in the empirical finding that these premia are persistent, exist across asset classes, and are sufficiently uncorrelated with each other that combining them produces better risk-adjusted outcomes than any single premium in isolation.
What a risk premium is
A risk premium is a return earned systematically as compensation for bearing a specific type of risk or providing a specific service to the market. The equity risk premium—the excess return of equities over the risk-free rate—is the most familiar example: investors demand higher returns from equities because equities are more volatile and more exposed to economic downturns than government bonds. The carry premium in currencies compensates investors for holding high-yielding currencies, which tend to depreciate more than low-yielding ones during global risk-off episodes. The momentum premium compensates investors for the behavioural discomfort of buying recent winners and selling recent losers—a strategy that feels uncomfortable even when it works.
The key distinction between a genuine risk premium and a data-mined anomaly is economic rationale. A genuine premium compensates for identifiable risk or market friction; an anomaly is a pattern that existed in historical data but has no clear reason to persist. Risk premia harvesting targets the former and is designed with reference to the growing academic literature on systematic return sources across asset classes—particularly the foundational work of Asness, Moskowitz, and Pedersen (2013) on value and momentum everywhere, and the broader literature on carry, trend, and quality.
The four main premia
Carry captures the yield differential between assets—high-yielding versus low-yielding currencies, high dividend versus low dividend equities, short-dated versus long-dated bonds in a positively sloped yield curve. Carry strategies are covered in detail in carry strategies in investing.
Value buys assets that are cheap relative to historical norms or fundamental anchors and shorts those that are expensive. In equities, this is the classic value factor; across asset classes, it means buying asset classes whose prices have fallen far below long-run equilibrium. Value strategies are contrarian and tend to have negative short-run momentum—they underperform when expensive assets continue rising and cheap assets continue falling. See value factor investing and mean reversion in systematic investing.
Momentum buys assets with strong recent performance and sells those with weak recent performance. Cross-sectional momentum—comparing asset performance relative to peers—is covered in cross-sectional momentum; time-series momentum is covered in time series momentum.
Trend following is related to momentum but distinct: it follows the absolute direction of an asset's price series rather than its rank relative to peers. See trend following explained and managed futures.
Diversification across premia
The primary advantage of combining multiple premia is diversification. Value and momentum are negatively correlated: momentum tends to perform well when recent trends persist, which are precisely the conditions when value—which bets on reversion—underperforms. Carry tends to perform well in calm markets and poorly during risk-off episodes; trend following tends to perform poorly in calm markets but captures the sustained downtrends that accompany crises. Combining these four premia produces a return stream with lower peak-to-trough drawdowns and higher risk-adjusted returns than any single premium, without needing a view on which premium will outperform in the near term.
Limitations
Risk premia strategies require trading costs to be rigorously modelled. Each signal generates portfolio turnover; each trade incurs a cost. Strategies that look attractive on a gross basis can deliver disappointing net returns once transaction costs are accounted for. The premia also go through extended periods of underperformance—the value premium underperformed significantly during 2010 to 2020; momentum experienced a sharp drawdown in 2009. Investors must be prepared for multi-year periods when one or more premia deliver negative returns without abandoning the strategy.
The premia can also become crowded: when many systematic investors pursue the same signals simultaneously, the trades become correlated and the crowding itself becomes a risk factor. A sharp reversal of a crowded position—such as the momentum crash of 2009—can produce losses that exceed what historical analysis would have suggested.
Risk premia harvesting in pfolio
pfolio's systematic portfolio construction implements risk premia signals across multi-asset portfolios. Signal performance, portfolio metrics, and asset class allocation are visible in pfolio Insights.
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