AQR Note to Investors
Tactical timing may be defined as dynamically changing allocations to two or more assets or strategies (or between a single asset and cash) in an attempt to increase returns. While rebalancing to constant weights already requires some turnover, tactical timing typically involves additional turnover and so any benefit must exceed the additional transaction costs incurred.
Investors tend to forget that tactical timing may incur a further penalty, which relates to forgone diversification. This penalty is larger for assets or strategies with low correlations to each other. So, for example, the penalty is more significant for tilts between stocks and bonds than for tilts between highly correlated equity sectors or countries.
At AQR, we are continuously researching potential indicators of time-varying returns of assets and investment strategies. But we also believe in diversification, and we therefore employ such tactical signals only where, and in such a way that we believe they can overcome the diversification hurdle described in this note.
The information contained herein is only as current as of the date indicated, and may be superseded by subsequent market events or for other reasons. The views and opinions expressed herein are those of the author and do not necessarily reflect the views of AQR Capital Management, LLC, its affiliates or its employees. This information 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. Past performance is not a guarantee of future results.