Cliff Asness: What Type Of Diversification Works Best During The Worst Of Times

Cliff Asness and the team at AQR recently released a great paper titled – It Was the Worst of Times: Diversification During a Century of Drawdowns. The paper uses nearly 100 years of data to evaluate the effectiveness of diversifying investments during the worst of times for most portfolios.

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Here’s the summary and conclusion:


Big equity drawdowns happen time and again and tend to drag down typical investor portfolios with them.

Unfortunately, attempting to tactically avoid the next equity sell-off is likely to disappoint investors. This article uses nearly 100 years of data to evaluate the effectiveness of diversifying investments during the worst of times for most portfolios.

We analyze the potential benefits and costs of shifting away from equities, including into investments that are diversifying (i.e., lowly correlated) and investments that are defensive (i.e., expected to outperform in bad times).

With regard to the latter, we observe an intuitive trade-off: investments with better hedging characteristics tend to do worse on average. Investors should evaluate this trade-off in deciding how—and how much—to diversify their exposure to equity drawdowns.


Bad times for investors are a sure thing, but ways to address them are not. The data does not support the conventional wisdom that expensive markets can help to time crashes.

Buying put options has fared worse than many investors might suspect, too. As with everything in investing, there is no perfect solution to addressing the risk of large equity market drawdowns. However, we find using nearly a century of data that diversification is probably (still) investors’ best bet. This is not to say that diversification is easy.

Investors should analyze the return and correlation profiles of their diversifying investments to prepare themselves for the range of outcomes that they should expect during drawdowns and also over the long term.

You can download the entire document here – AQR – It Was the Worst of Times: Diversification During a Century of Drawdowns.

For more articles like this, check out our recent articles here.

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