Driving with the Rear-View Mirror

U.S. equities enjoyed a banner past decade. To analyze what assumptions investors need to have about the next ten years to expect a repeat performance, we decompose U.S. equity market excess-of-cash returns into four components – dividend yield, real earnings growth, multiple expansion, and the real return on cash.

Tax Aware

A 3-for-1 Solution for Concentrated Stock

Long/short tax-aware factor strategies may provide the means to offset gains resulting from a transition from a concentrated stock to a diversified portfolio.

Annual ESG Report 2023

Tax Aware

AQR Factor Research Papers Win Prestigious Academic Awards

Factor investing (combined with tax-aware implementation) can offer investors substantial rewards in the form of both pre-tax returns and tax benefits. Two papers by our colleagues recently won highly prestigious awards from top academic and practitioner journals for their research on factor investing, demonstrating our commitment to top-notch factor research.

Tax Aware

Combining VPFs and Tax-Aware Strategies to Diversify Low-Basis Stock

We illustrate how combining VPFs (variable prepaid forwards) with tax-aware strategies can help diversify low-basis stock and thereby improve after-tax wealth accumulation. Long-run after-tax wealth outcomes are significantly better when a VPF is combined with tax-aware long-short factor strategies rather than with other alternatives, such as a direct-indexing strategy or a market index fund.

ESG Investing

In Search of the True Greenium

The greenium (the expected return of green securities relative to brown) is a central impact measure for ESG investors. We propose a robust green score combined with forward-looking expected returns, yielding a more precisely estimated annual equity greenium.

Machine Learning

The Virtue of Complexity in Return Prediction

Contrary to conventional wisdom, we theoretically prove that simple models severely understate return predictability compared to “complex” models in which the number of parameters exceeds the number of observations. We empirically document the virtue of complexity in U.S. equity market return prediction. Our findings establish the rationale for modeling expected returns through machine learning.

Tax Aware

Making VPFs Work Harder for You

There is a range of solutions aimed at reducing the risk of concentrated stock tax-efficiently: completion portfolios, exchange funds, charitable giving, just to name a few. But for some investors, Variable Prepaid Forwards (VPFs ) are a favorite. It’s not hard to see why.

Alternative Investing

Is Your Equity Hedge Fund Portfolio Resilient Enough for Uncertain Times?

We analyze the historical macroeconomic sensitivity of traditional asset classes and major hedge fund strategies. We show that the average hedge fund is unlikely to provide meaningful diversification during periods of macro uncertainty, which are also typically difficult for traditional assets. However, long/short low-risk strategies have tended to exhibit low macro sensitivity.

Tax Aware

The Enduring Appeal of Gain Deferral, Part 2

Our previous post showed the power of deferral for building wealth, but one key assumption in that analysis was that tax rates remain constant. In this post, we discuss whether gain deferral is still a good idea if you think tax rates might be higher in the future.

Tax Aware

The Enduring Appeal of Gain Deferral, Part 1

We find that strategies that help defer gains can be highly beneficial, irrespective of the investment horizon and especially over the long term.