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Journal Article

Investing in Interesting Times

Given 2022’s cheapening of asset valuations, some have questioned if we are still in a world of low expected returns. We review what’s changed after 2022, showing that the lower expected return picture has not been substantially altered for many asset classes. We provide some suggestions to potentially ameliorate the pain caused by this environment.

Perspective

Volatility Laundering

While not alone, I have become one of the chief gadflies of the private equity industry. But I’m a selective gadfly. The illiquidity and non-marking that comes with private investments used to be acknowledged as a bug. These days, however, this same bug is sold as a feature – and sometimes, as in a recent Institutional Investor op-ed, brazenly so. My response in II covers what I think are the increasingly harmful ramifications of taking as reality the unrealistically smoothed returns that private strategies are all-too-happy to report.

Alternative Thinking

Should Your Portfolio Protection Work Fast or Slow?

2022’s drawdown provides a clear picture for the types of strategies that can actually deliver in a “slow burn” market downturn. While some options-based strategies have generated positive returns, in many cases they have disappointed. In contrast, trend following strategies have generally posted very strong returns. Looking ahead, many of the macro conditions that have been advantageous to trend following are still in place—and have historically tended to persist.

Data Set

Time Series Momentum: Factors, Monthly

We have updated and extended our data set for “Time Series Momentum" (Moskowitz, Ooi and Pedersen, 2012), in which we document an asset-pricing anomaly that is consistent across different asset classes and markets. We update the returns monthly.

Data Set

Commodities for the Long Run: Index Level Data, Monthly

We have updated the data set for the paper “Commodities for the Long Run”, in which we analyze a novel data set of commodity futures prices going back to 1877, allowing us to show that returns of commodity futures indices have, on average, been positive over the long run. We update the data monthly.

Quick Clips

Quick Clips: New Rules of Diversification

Hear from AQR's Portfolio Solutions Group on the the prospects for stock and bond markets, the impact of macroeconomic risks on a range of investments, and the use of diversifying investments to fortify portfolios.

Perspective

The Raisons d'être of Managed Futures

Managed Futures strategies have an implicit dual mandate, First, to deliver positive returns on average and second, to generate especially attractive returns during large equity market drawdowns. This is one of the big reasons managed futures strategies can be valuable in a portfolio. Unfortunately, by and large, the industry—intentionally or not—has been optimizing for one at the expense of the other by introducing carry and market beta exposure.

Alternative Thinking

New Rules of Diversification

During the first half of 2022, equity markets tumbled around 20% from their peak, with losses on typical stock/ bond portfolios almost as large. More worryingly, this type of downturn may be unfamiliar to many younger investors: with inflation still high, there is little prospect of central banks riding to the market’s rescue. We assess the prospects for stock and bond markets after the H1 selloff, consider the impact of macroeconomic risks on a range of investments, and explore the use of diversifying investments to fortify portfolios.

Quick Clips

Quick Clips: The Stock/Bond Correlation

For the past two decades, the stock/bond correlation (SBC) has been consistently negative, and investors have been able to rely on their bond investments for portfolio protection when equities sell off. However, macroeconomic changes – like heightened inflation risk – could push this key asset allocation input into positive territory.

Journal Article

A Changing Stock-Bond Correlation

For the past two decades, the stock/bond correlation – a fundamental detriment of risk in traditional portfolios – has been consistently negative. However, this hasn’t always been the case, and a positive stock/bond correlation could reappear due to macroeconomic changes. In this article, we assess the broad implications this would have for investors and set out practical steps to prepare for such an outcome.