Cliff and his colleagues lay out some basic tenets that they think are often ignored but that they think any market-timing system — or any test of such a system — should follow.
It seems that now everyone wants to time factors. Indeed, we’d love to as well if we thought it was a very useful endeavor. But, although tempting, in an editorial piece for a special upcoming Journal of Portfolio Management issue focused on quantitative investing — written at the kind request of long-time editor, Frank Fabozzi — I argue that this tempting siren song should be resisted, even if I know some will be disappointed with this view.
Cliff argues that certain well-known classic strategies that have worked over the long term will continue to work going forward, though perhaps not at the same level and with different risks than in the past. He focuses on classic “factor”-type strategies, things like value, momentum, carry and quality/defensive.
For me, a good book is one that speaks to something important and that causes me to think differently and more clearly about the chosen topic. My AQR colleague Lasse Pedersen has written just such a book, Efficiently Inefficient: How Smart Money Invests and Market Prices Are Determined. (Full disclosure: he extols me as one of many, along with our competitors.) From now on, there are two kinds of investors: the efficiently inefficient ones and the merely inefficient ones who didn’t read this book.
Critics seeking to attack risk parity don't have to go all tin-foil-hat crazy — blaming the strategy for the exceptional market volatility last summer. Instead, they could just do what people usually do, attack recent performance, because risk parity has undeniably been through a tough relative performance period of late. But we still believe in it as an alternative long-term strategic asset allocation that’s typically used to diversify a more traditional equity-dominated allocation.