A Research-Driven Look at Systematic Return Sources
What Is Risk Premium Harvesting?
At QuantReturns, we spend a lot of time digging into niche edges: timing institutional flows, capturing futures reversals or exploiting behavioural biases. These strategies often aim to extract alpha, that elusive outperformance beyond market risk.
But there’s another category of strategies that’s equally important to understand, even if it’s less flashy: risk premium harvesting.
This post looks at what that means, how it’s different from alpha, and why it still plays a core role in many systematic frameworks, including several we track at QuantReturns.com.
What Are Risk Premiums?
Risk premiums are compensation for bearing specific types of market risk, the kind most people would rather avoid. Think equity crashes, volatility spikes, credit defaults. Over time, researchers have found that investors who systematically bear these risks tend to be rewarded with higher returns.
Not because of skill. Not because of signals. Just by leaning into discomfort, consistently.
Common Risk Premiums
Here are some well-known risk premiums that have been studied and tracked for decades:
Equity Risk Premium: Long exposure to broad equities has historically delivered returns above cash or bonds. It's the foundation of many portfolios — and, in many ways, the original risk premium.
Volatility Risk Premium: Selling options (or volatility more broadly) tends to offer a positive return over time. You're effectively insuring others and getting paid for the risk of extreme events.
Credit Risk Premium: Corporate bonds often yield more than government bonds. The difference (the credit spread) is compensation for default and liquidity risk.
Term Premium: Longer-dated bonds typically offer higher yields than short ones, compensating for inflation and interest rate uncertainty.
These aren’t anomalies. They’re structural features of the market that are often linked to investor preferences, constraints and aversions.
Is Gold a Risk Premium?
The short answer is no.
Gold doesn’t pay a yield, doesn’t compensate for specific risk exposure and doesn’t behave like other risk premia.
So what is it?
It’s a store of value, particularly in inflationary or unstable periods.
It’s a hedge against currency debasement or real yield declines.
It’s a potential diversifier when traditional assets come under pressure.
That doesn’t make gold useless, it just means it plays a different role than equity, credit or vol premiums. At QuantReturns, we track it not for premium harvesting, but for its behaviour as a macro-sensitive asset class.
Equity Risk Premium: Simple, Scalable, Testable
From a quantitative standpoint, the equity risk premium is among the easiest to gain exposure to:
Long exposure to index ETFs or futures (e.g., SPY, QQQ, ES)
Periodic rebalancing
Optional overlays: trend filters, seasonality, or valuation rules
Unlike alpha-seeking strategies that rely on timing, predictions, or flows, equity premium harvesting is structural. It doesn’t require signals. It just requires consistency.
This makes it an ideal baseline strategy as it is simple to model, transparent in logic, and well-documented in both academic and practitioner research.
Why We Care: Blending Simple with Smart
Here’s where things get interesting.
Risk premia are simple and robust. Alpha strategies are complex and targeted. When you combine the two, you can get the best of both:
Stability from structural exposure
Boost from tactical edge
Lower correlation between components
Better risk-adjusted returns (e.g., Sharpe ratios)
In short: the whole can be greater than the sum of its parts.
At QuantReturns, we’re increasingly focused on stacking strategy layers, not just testing alpha signals in isolation, but seeing how they interact with foundational risk exposures.
In our next post, we’ll walk through a combined strategy, one that layers equity risk premium with a tactical alpha strategy we’ve already covered.
We’ll look at:
How the combo affects return and drawdown profiles
What happens to Sharpe ratios and downside risk
How to model the interaction without overfitting
Wrapping Up: The Role of Risk Premia in Strategy Design
Research across decades and asset classes consistently shows that exposure to risk premia, such as long-duration government bonds, investment-grade corporate credit and broad equity markets, has accounted for a significant portion of long-term return in many institutional and academic models.
These exposures often form the foundation of a strategy architecture. They are structurally grounded, relatively simple to model and have been widely studied as the core drivers of returns above the risk-free rate.
From a research perspective, these risk premium components offer a useful starting point. Once they’re in place, additional layers — like alpha strategies, tactical signals, or inefficiency-based models — can be evaluated for their marginal contribution to performance, diversification, or drawdown mitigation.
In short: risk premium harvesting may not be exciting, but it’s hard to ignore. It often forms the baseline upon which more complex strategies can be built and tested.
If you’re interested in how these building blocks behave, both alone and combined then stay tuned. Strategy blending is where things start to get really interesting.