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Working Paper

Financial Machine Learning

In this survey the nascent literature on machine learning in financial markets, we highlight the best examples of what this line of research has to offer and recommend promising directions for future research.

Alternative Thinking

Key Design Choices When Building a Risk-Mitigating Portfolio

After 2022 showed the downside of traditional portfolios’ reliance on equity risk, many investors have recently begun to reconsider the role of risk-mitigating portfolios within their broader asset allocations. We show why we believe trend following deserves a prominent place in any serious risk-mitigation portfolio.

Journal Article

International Diversification—Still Not Crazy after All These Years

International diversification has hurt US-based investors for over 30 years, but the long-run case for it remains relevant. We show that both financial theory and common sense favor international diversification, buttressed by empirical supportive evidence. Additionally we show it would be dangerous to extrapolate the post-1990 outperformance of US equities.

White Paper

Re-Emerging Equities

The expected premium for investing in emerging versus developed equity markets is on the upper end of its past 25-year range. At the same time, many of the risks historically associated with emerging markets have secularly declined. We believe there is a strong case for investors to “re-up” their emerging allocations.

Perspective

Holding Our Breadth

Regular readers probably noticed I’ve been talking a lot about value lately. While I’m all for shining the spotlight onto the value dislocation, my colleagues also continue to produce a great breadth of research worth adding to your non-value-reading-list. I preview some of my recent favorites. 

Quick Takes

Quick Clips: 2023 Capital Market Assumptions for Major Asset Classes

Hear from Pete Hecht and Thomas Maloney as they provide short soundbytes based on our Q1 2023 Capital Market Assumptions for Major Asset Classes

Alternative Thinking

2023 Capital Market Assumptions for Major Asset Classes

We update our estimates of medium-term (5- to 10-year) expected returns for major asset classes. We also include two special topics: one highlighting the case for emerging market equities, and the other assessing the impact of large interest rate rises on various risk premia.

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.

Quick Takes

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.

Working Paper

Machine Learning and the Implementable Efficient Frontier

We propose that investment strategies should be evaluated based on their net-of-trading-cost return for each level of risk, which we term the "implementable efficient frontier." While numerous studies use machine learning return forecasts to generate portfolios, their agnosticism toward trading costs leads to excessive reliance on fleeting small-scale characteristics, resulting in poor net returns. We develop a framework that produces a superior frontier by integrating trading-cost-aware portfolio optimization with machine learning