This is only the teaser. The real essay is admittedly quite the lengthy tome. It’s ok to just read this quick summary, that’s what it’s here for. But, I do hope you give the whole thing a go. For those looking for a middle-ground, we are planning a “medium” version longer than this teaser, but more manageable than the full opus.
[timeless]
Q2 hedge fund letters, conference, scoops etc
If you can find diversifying, positive expected return liquid alts then you can materially improve a portfolio. I make no claims that this is an easy thing to do, or that the entire universe labeled “liquid alts” is, in aggregate, delivering that. But I believe the bar is not as high as many think. You don’t need a strategy that never loses money to add value to your portfolio. Liquid, sometimes well-known strategies, with attractive but realistic risk-adjusted returns, which can be offered broadly enough to move the dial for many investors, are likely more important than “magic” strategies that (over?) promise much more.
Recently, the quantitative factor-based liquid alts that we favor at AQR have had tough times. Every time any of our strategies go through tough periods, we take a step back and consider specific hypotheses as to whether the recent returns are a harbinger of the future. Has the world changed such that these strategies are now “broken”? Are they too crowded or costlier to trade now versus the past? If the strategies pass all tests we can come up with, as they do today, we then rely on very long-term evidence across many asset classes and geographies, and on the economic motivations behind why the ideas supporting our strategies should work. We consider this combination of evidence and economic intuition an overwhelmingly strong case but not one inviolate to critical examination on occasion.
We acknowledge and, speaking even for myself, suffer from many of the difficulties that come with sticking with such strategies through tough times. Of course, this difficulty is a big part of why we think the strategies work to begin with and are sustainable going forward. If sticking with them were easy, the threat of them being “arbitraged away” would indeed be much greater, and nobody would take the other side.
As tempting as it may be, we do not call for a quick miracle bounce-back. But we do believe the case that adding some specific liquid alts, ones that are based on a gigantic amount of evidence and economic common sense and that are truly “alt” (meaning low correlation to traditional assets), remains as strong as ever, especially as compared to the current, quite expensive levels of traditional stock and bond markets.
We’ve seen this movie before, and it had a happy ending.
OK, that’s the short version, now dive in!
Article by AQR
