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Perspective
Buffer Madness
May 8, 2025
Last month, we posted a short piece critical of options-based strategies such as “defined outcome funds” and “buffered ETFs”. It showed that the vast majority of them failed to deliver either better returns or less-severe drawdowns than a simple combination of passive equities + cash. Since then, we’ve gotten quite a bit of—let’s call it—feedback. My partner Dan, who wrote the original, now writes the devastating response to his predictable critics. My only criticism is he is too kind.
Perspective
Rebuffed: A Closer Look at Options-Based Strategies
March 21, 2025
Options-based strategies, often labeled with words like “Buffered,” “Overlay,” and “Defined Outcome” have amassed a sizeable chunk of investors’ money, lured by the promise of market-like returns with less risk. These strategies use options to capture the upside or downside of an asset’s returns, and managers who employ a mix of options can tailor an asset’s risk/return profile to align with an investor’s goals. But can they actually deliver?
Perspective
In Praise of High-Volatility Alternatives
September 4, 2024
This note argues that good higher-volatility alternative investments, that are indeed often very hard to stick with, can be important tools in constructing the best overall portfolio. I think if (a big if) investors can stick with them, they are often a more effective tool than their lower-volatility cousins. Basically, I think they are underutilized
Journal Article
Fact, Fiction, and Factor Investing: Practical Applications
September 1, 2023
This piece distills the central concepts and practical takeaways of our Fact, Fiction, and Factor Investing article, which examined many claims about factor investing, referencing an extensive academic literature and performing simple, yet powerful, analysis to address those claims.
Working Paper
Financial Machine Learning
August 1, 2023
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.
Perspective
Volatility Laundering
January 6, 2023
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?
Q4 2022
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.
Journal Article
Fact, Fiction, and Factor Investing
December 22, 2022
Factor investing has been around for several decades, backed by an enormous body of literature, and yet it is still surrounded by much confusion and debate. We examine many of the claims about factor investing, referencing the academic literature and performing simple, yet powerful, analysis to address them.
Quick Takes
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.
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.