This is only the teaser. The real essay is admittedly quite the lengthy tome. It’s ok to just read this quick summary, that’s what it’s here for. But, I do hope you give the whole thing a go. For those looking for a middle-ground, there is also a “medium” version longer than this teaser, but more manageable than the full opus.
If you can find diversifying, positive expected return liquid alts then you can materially improve a portfolio. I make no claims that this is an easy thing to do, or that the entire universe labeled “liquid alts” is, in aggregate, delivering that. But I believe the bar is not as high as many think. You don’t need a strategy that never loses money to add value to your portfolio. Liquid, sometimes well-known strategies, with attractive but realistic risk-adjusted returns, which can be offered broadly enough to move the dial for many investors, are likely more important than “magic” strategies that (over?) promise much more.
Recently, the quantitative factor-based liquid alts that we favor at AQR have had tough times. Every time any of our strategies go through tough periods, we take a step back and consider specific hypotheses as to whether the recent returns are a harbinger of the future. Has the world changed such that these strategies are now “broken”? Are they too crowded or costlier to trade now versus the past? If the strategies pass all tests we can come up with, as they do today, we then rely on very long-term evidence across many asset classes and geographies, and on the economic motivations behind why the ideas supporting our strategies should work. We consider this combination of evidence and economic intuition an overwhelmingly strong case but not one inviolate to critical examination on occasion.
We acknowledge and, speaking even for myself, suffer from many of the difficulties that come with sticking with such strategies through tough times. Of course, this difficulty is a big part of why we think the strategies work to begin with and are sustainable going forward. If sticking with them were easy, the threat of them being “arbitraged away” would indeed be much greater, and nobody would take the other side.
As tempting as it may be, we do not call for a quick miracle bounce-back. But we do believe the case that adding some specific liquid alts, ones that are based on a gigantic amount of evidence and economic common sense and that are truly “alt” (meaning low correlation to traditional assets), remains as strong as ever, especially as compared to the current, quite expensive levels of traditional stock and bond markets.
We’ve seen this movie before, and it had a happy ending.
OK, that’s the short version, now dive in!
The views and opinions expressed herein are those of the author and do not necessarily reflect the views of AQR Capital Management, LLC (“AQR”), its affiliates or its employees. This document has been provided to you solely for information purposes and does not constitute an offer or solicitation of an offer or any advice or recommendation to purchase any securities or other financial instruments and may not be construed as such. The factual information set forth herein has been obtained or derived from sources believed by the author and AQR to be reliable but it is not necessarily all-inclusive and is not guaranteed as to its accuracy and is not to be regarded as a representation or warranty, express or implied, as to the information’s accuracy or completeness, nor should the attached information serve as the basis of any investment decision. Past performance is not a guarantee of future performance.
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The information contained herein is only as current as of the date indicated and may be superseded by subsequent market events or for other reasons. Charts and graphs provided herein are for illustrative purposes only. Nothing contained herein constitutes investment, legal, tax or other advice nor is it to be relied on in making an investment or other decision.
There can be no assurance that an investment strategy will be successful. Historic market trends are not reliable indicators of actual future market behavior or future performance of any particular investment which may differ materially and should not be relied upon as such. This material should not be viewed as a current or past recommendation or a solicitation of an offer to buy or sell any securities or to adopt any investment strategy.
The information in this document may contain projections or other forward-looking statements regarding future events, targets, forecasts or expectations regarding the strategies described herein and is only current as of the date indicated. There is no assurance that such events or targets will be achieved, and they may be significantly different from that shown here. The information in this document, including statements concerning financial market trends, is based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. Performance of all cited indices is calculated on a total return basis with dividends reinvested.
INVESTMENT IN ANY OF THE STRATEGIES DESCRIBED HEREIN CARRIES SUBSTANTIAL RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL. THERE IS NO GUARANTEE THAT THE INVESTMENT OBJECTIVES OF THE STRATEGIES WILL BE ACHIEVED, AND RETURNS MAY VARY SIGNIFICANTLY OVER TIME. INVESTMENT IN THE STRATEGIES DESCRIBED HEREIN IS NOT SUITABLE FOR ALL INVESTORS. HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH, BUT NOT ALL, ARE DESCRIBED HEREIN. NO REPRESENTATION IS BEING MADE THAT ANY FUND OR ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN HEREIN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY REALIZED BY ANY PARTICULAR TRADING PROGRAM. ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS THAT CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS, ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS.
The hypothetical performance results contained herein represent the application of the quantitative models as currently in effect on the date first written above and there can be no assurance that the models will remain the same in the future or that an application of the current models in the future will produce similar results because the relevant market and economic conditions that prevailed during the hypothetical performance period will not necessarily recur. Discounting factors may be applied to reduce suspected anomalies. This backtest’s return, for this period, may vary depending on the date it is run. Hypothetical performance results are presented for illustrative purposes only. In addition, our transaction cost assumptions utilized in backtests, where noted, are based on AQR’s historical realized transaction costs and market data. Certain of the assumptions have been made for modeling purposes and are unlikely to be realized. No representation or warranty is made as to the reasonableness of the assumptions made or that all assumptions used in achieving the returns have been stated or fully considered. Changes in the assumptions may have a material impact on the hypothetical returns presented. Actual advisory fees for products offering this strategy may vary.
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