Alternative risk premium: specification noise

Alternative risk premium (ARP) comprises a wide range of rules-based trading strategies spanning all major asset classes. Its unique nature creates ongoing benchmark challenges, in terms of approach and data availability. We focus on two strategies—cross-sectional value for US stocks and equity time-series trend—highlighting the difficulties in assessing the performance of ARP fund managers. At the heart of the matter is specification noise—potentially material performance dispersion among equally defensible benchmark methodologies. The dearth of lengthy return series is an exacerbating factor. We address practical consequences of the absence of de facto benchmarks, highlight the data void yet to be filled, and propose a framework for approaching performance evaluation of ARP-fund managers that distinguishes expectation, surprise, style, implementation and allocation contributions.