QCM NexusOne Insight # 7

August 2025

Aref Karim - Ershadul Haq - Raami Karim

RISK PREMIA UNLOCKED

WHY STRUCTURAL RETURNS MATTER

Where Predictability Begins

In investing, consistency is rare and highly valued. The pursuit of repeatable returns, independent of short-term narratives or market predictions, is what draws many sophisticated investors to systematic strategies. At the core of these strategies lies a fundamental question: What are we harvesting? The answer is risk premia.

Far from being a buzzword, risk premia are the foundation of disciplined, rules-based investing. Understanding them is essential for building resilient portfolios designed to perform over the long run.

What is Risk Premium?

Risk premium is the return earned for taking on a specific type of risk, not from a one-off trade or a market call, but a structural source. It persists over time because of how markets are built and how participants behave.

The most familiar example is the equity risk premium. This is the extra return investors demand for owning stocks over cash, compensating for volatility and economic uncertainty. But equities are just one source. Systematic investors can tap into a broad range of risk premia, including:

-          Term premium:  compensation for holding long-duration bonds exposed to interest rate and inflation risk.

-          Carry premium:  earned by owning higher-yielding assets or currencies versus lower-yielding ones.

-          Trend premium:  derived from persistent price movements over time.

-          Volatility premium:  the return from selling volatility, based on the common gap between implied and realized volatility.

These premia do not arise from market inefficiencies. They exist because different participants have different constraints and objectives. In functioning markets, risks are transferred and priced every day.

Why Risk Premium Beats Forecasts

Forecasts are tempting. But they are also fragile. They depend on getting not just the direction right, but also the timing and magnitude. Risk premia, in contrast, are grounded in long-term structural patterns and behavioural dynamics.

They arise from persistent imbalances, such as:

-          Central banks influencing volatility.

-          Institutional mandates or constraints limiting flexibility.

-          Momentum-driven crowding.

-          Recurring behavioural biases like overreaction or herding.

The strength of risk premia lies in their measurability and persistence. They can be researched, tested, and combined to provide a statistical edge rooted in their origin and logic. And they can be often without making directional bets.

Risk Premia in the Real World

Capturing risk premia is not as easy as turning a switch. Each premium behaves differently depending on the environment:

-          Trend signals may work when markets are directional but fade in choppy conditions.

-          Carry trades can falter in risk-off regimes.

-          Volatility-selling strategies must be robust enough to withstand occasional spikes.

That is why implementation matters. A successful approach blends multiple return sources, adapts to shifting regimes, and enforces disciplined risk controls. The goal is not to rely on a single edge, but to construct a balanced portfolio with many.  They must perform in real time, not just in back-tests.

The Power of Diversification

No risk premium is perfect in isolation. But together, they can create a powerful, more consistent return engine.

-          Trend-following may excel in dislocated markets, while mean-reversion can thrive in stable ranges.

-          Carry works best in calm conditions; volatility strategies can buffer periods of excess fear.

-          Equity risk premia bring growth exposure but also beta, which can be mitigated through diversification.

The aim is not to find the best premium. It is to combine them in a way that different return streams activate at different times, smoothing performance and boosting the odds of steady compounding.

Patience is essential, as not every strategy will shine in every regime. Rigorous monitoring and adjustment keep the portfolio resilient, allowing it to weather both expected and unexpected storms. Over time, it is this persistent, systematic approach that turns a collection of risk premia into a lasting foundation for investment success.

NexusOne Insight: Risk Premia

At NexusOne, our systematic macro approach starts with a recognition for risk premia and the role they play across global markets.

-          We do not rely on forecasts or static views.

-          We combine macro, trend, mean-reversion, and volatility-based signals into a single, balanced portfolio.

-          We operate across asset classes, equities, rates, currencies, and commodities, so no single risk dominates.

-          We apply dynamic overlays to manage exposure and adapt to changing market conditions.

Our job is not to predict the next move. It is to harness the return streams markets offer with discipline, transparency, and resilience.