Portfolio Risk and Performance
Should Your Portfolio Protection Work Fast or Slow?
Q4 2022
Topics - Portfolio Risk and Performance Alternative Investing Trend Following Portfolio Construction Macroeconomics
We have often argued that investments that perform well in protracted market drawdowns may be more valuable than ones that perform better during sharp crashes. 1 1 Close This can be shown empirically by comparing two equally bad “probability events” of different lengths (e.g., the 5th percentile worst month compared to the 5th percentile worst year)—the longer-lived drawdowns are more likely to prevent investors from reaching their multi-year return objectives. For more discussion on this topic, see McQuinn et al (2020). This year’s drawdown, among the more persistent in recent memory, provides a clear picture for the types of strategies can actually deliver in a “slow burn.”
While some options-based strategies have generated positive returns, in many cases they have disappointed in terms of magnitude. In contrast, trend following strategies have generally posted very strong returns (consistent with what we’ve documented in previous market drawdowns and crises). Looking ahead, many of the macro conditions that have been advantageous to trend following are still in place—and have historically tended to persist.
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We thank Ashwin Thapar, Dan Villalon and Ekin Zorer for their work on this paper. We also thank Gregor Andrade, Antti Ilmanen, Pete Hecht, Thom Maloney, Yao Hua Ooi, and Lasse Pedersen for helpful comments.
This document is not intended to, and does not relate specifically to any investment strategy or product that AQR offers. It is being provided merely to provide a framework to assist in the implementation of an investor’s own analysis and an investor’s own view on the topic discussed herein.
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This material is not research and should not be treated as research. This paper does not represent valuation judgments with respect to any financial instrument, issuer, security or sector that may be described or referenced herein and does not represent a formal or official view of AQR. The views expressed reflect the current views as of the date hereof and neither the author nor AQR undertakes to advise you of any changes in the views expressed herein.
The information contained herein is only as current as of the date indicated, and may be superseded by subsequent market events or for other reasons.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. The information in this presentation has been developed internally and/or obtained from sources believed to be reliable; however, neither AQR nor the author guarantees the accuracy, adequacy or completeness of such information. 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. Diversification does not eliminate the risk of experiencing investment losses.
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