Asset Allocation

Tactical Tilts and Foregone Diversification

Topics - Asset Allocation

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Tactical Tilts and Foregone Diversification

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.

AQR Capital Management, LLC, (“AQR”) provide links to third-party websites only as a convenience, and the inclusion of such links does not imply any endorsement, approval, investigation, verification or monitoring by us of any content or information contained within or accessible from the linked sites. If you choose to visit the linked sites, you do so at your own risk, and you will be subject to such sites' terms of use and privacy policies, over which has no control. In no event will AQR be responsible for any information or content within the linked sites or your use of the linked sites.

The information contained herein is only as current as of the date indicated, and may be superseded by subsequent market events or for other reasons.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.


Hypothetical performance results have many inherent limitations, some of which, but not all, are described herein. The hypothetical performance shown was derived from the retroactive application of a model developed with the benefit of hindsight.  Hypothetical performance results are presented for illustrative purposes only.


Diversification does not eliminate the risk of experiencing investment loss.


Certain publications may have been written prior to the author being an employee of AQR.

This material is intended for informational purposes only and should not be construed as legal or tax advice, nor is it intended to replace the advice of a qualified attorney or tax advisor.


AQR Capital Management is a global investment management firm, which may or may not apply similar investment techniques or methods of analysis as described herein. The views expressed here are those of the authors and not necessarily those of AQR.