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White Paper
A Better Alternative: Diversify Your Diversifiers
3Q 2022
After the strong performance of stocks and bonds over the last decade may come a long hangover, as investors today face anemic 5-10 year returns in traditional asset classes. Some liquid alternatives represent an attractive option but come with their own challenges. Our solution is to focus on truly diversifying alternatives and diversify across them – resulting in returns that may be less volatile, and a portfolio that may be easier to stick with.
Quick Clips
Quick Clips: New Rules of Diversification
September 9, 2022
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
August 18, 2022
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
Alternative Thinking
New Rules of Diversification
Q3 2022
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
Q2 2022
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.
Alternative Thinking
The Stock/Bond Correlation
Q2 2022
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.
White Paper
Building a Better Commodities Portfolio
April 22, 2022
Interest in commodities is rising again, thanks to their tendency to be particularly strong diversifiers during periods of rising or volatile inflation. We review what a “best-in-class” commodity portfolio looks like by exploring three potential enhancements to a passive approach to the asset class.
Perspective
Everything and More
April 4, 2022
My colleague and former classmate Antti Ilmanen is at it again with his second book, Investing Amid Low Expected Returns. Very rarely does a sequel stand up to the original (see Jaws II), but that's certainly not the case here!
Alternative Thinking
2021 Capital Market Assumptions for Major Asset Classes
Q1 2021
We update our estimates of medium-term (5- to 10-year) expected returns for major asset classes. We also discuss what investors should expect from the stock-bond correlation in the coming decade.
Perspective
Now There's Nothing Certain But Death
January 15, 2021
Over the last few years, we’ve built a considerable effort in tax-optimized investing. Admittedly, this was a little bit of a “if we build it, they will come” venture, given many taxable investors seem to ignore after-tax returns. Thus, it is gratifying to see my AQR colleagues win the Top Graham and Dodd Award for their research on tax optimization, a topic that I’ve long thought deserved a much more prominent place in asset management.