AQR is a global investment management firm built at the intersection of financial theory and practical application. We invest on behalf of our clients — from pension funds and insurance companies to endowments and foundations to sovereign wealth funds and financial advisors. Our commitment to our clients is to help them exceed their long-term objectives. We do this by filtering out market noise to identify and isolate what matters most, and by implementing ideas that stand up to rigorous testing.
Our focus on research-driven, practical insights powered by advanced technology, economic intuition and firm-wide risk management, has made us leaders in alternative and traditional strategies and explains why so many types of investors seek our expertise in meeting their financial challenges.
Some assert that once a strategy is “discovered” it can’t work anymore. Others, often implicitly, assume the future will look as wonderful as the past. Perhaps not surprisingly, we stake out a middle ground. We’re going to argue that certain well-known classic strategies that have worked over the long term will continue to work going forward, though perhaps not at the same level and with different risks than in the past. We will focus on classic “factor”-type strategies. Our favorites won’t shock anyone. They are things like value, momentum, carry and quality/defensive. Of these, we’ll use value investing as a common example throughout this discussion.
This issue of Alternative Thinking discusses strategic portfolio construction, focusing on top-down decisions where mean-variance optimization, always to be used carefully, is of even more limited use. How to combine traditional asset classes with illiquids or with alternative risk premia? How much illiquidity, leverage and shorting to allow? The answers — and thus major portfolio choices — are largely driven by investor beliefs and constraints.
The authors investigate Active Share, a measure meant to determine the level of active management in investment portfolios, and find it wanting. They evaluate the claim that the measure predicts investment performance by considering theoretical arguments and via empirical analysis. They do not find strong economic motivations for why Active Share may correlate with performance.