While equities and bonds are often viewed as reliable sources of long-term returns, many investors are perhaps overly-dependent on them. As such, we believe that investors can benefit by diversifying to other sources of return – such as a market-neutral Alternative Risk Premia (ARP) strategy.
In our paper, we illustrate that harvesting six well-known long/short risk premia – Value, Momentum, Carry, Defensive, Trend and Volatility – across multiple liquid asset groups may have the potential to deliver attractive risk-adjusted returns. This is because correlations across risk premia and asset groups tend to be low, resulting in strong diversification benefits when combined in a single portfolio.
Additionally, we demonstrate that a market-neutral ARP strategy has generally low-to-no correlation to a traditional 60/40 or hedge fund portfolio and, when added to either, may improve risk-adjusted returns. With the many benefits that an ARP strategy can bring, we believe it can function as a core alternative solution in investors’ portfolios.
The information contained herein is only as current as of the date indicated, and may be superseded by subsequent market events or for other reasons.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.