AQR Working Paper
We examine the trading costs, net-of-cost returns and break-even fund sizes of equity strategies designed to capture several of the main asset pricing anomalies documented in the literature. Using nearly $1 trillion of live trading data from a large institutional money manager across 19 developed equity markets from 1998 to 2011, we approximate the trading costs of a large arbitrageur.
We find that our trading cost estimates are many times smaller and our fund sizes are more than an order of magnitude larger than those claimed in the literature. These results are driven by two key innovations in our study. First, we use actual trading costs from a real-world arbitrageur to estimate price impact rather than aggregated trade and quote level data used in other studies. Second, we use portfolio optimization techniques to design strategies that further decrease realized trading costs, as a real-world investor would do.
The results and tradeoffs between trading costs and tracking error vary across the different anomalies/styles. Value and momentum benefit the most from trading-cost optimization and face the most favorable tradeoffs. Short-term reversals, however, do not survive trading costs at reasonable size and do not benefit much from portfolio optimization.
Our results indicate that strategies based on size, value and momentum can be deployed at very high asset size and still survive trading costs, while short-term reversals cannot. Hence, the return premia associated with size, value and momentum appear to be robust, sizable and implementable.
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 Capital Management, LLC (“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. This document is not to be reproduced or redistributed to any other person. The information set forth herein has been provided to you as secondary information and should not be the primary source for any investment or allocation decision. Past performance is not a guarantee of future performance.
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.
The information in this paper 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 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.