“Low-Risk Investing Without Industry Bets” Clifford S. Asness, Andrea Frazzini, and Lasse H. Pedersen, Financial Analysts Journal vol 70(4): 24–41 Some investors assume that the attractive risk-adjusted returns of investing in low-beta stocks have been driven by a structural bias toward defensive industries. The authors, all principals at AQR, seek to dispel this notion by…
Advice in Brief Comparisons to 2007 are growing. A key distinction today is that policy rates in most developed economies remain near zero. With little inflationary pressure, this cycle could last another several years. This is neither a time to be ramping up nor pulling back risk taking. It is a time for diversification, modest…
Ominously familiar warning signs beg the question of whether a replay of 2007 is at hand; the answer is complicated Recent market activity has seemingly combined some of the excesses of 1999 with those of 2007. On a more general level, investors have grown more bullish and volatility across asset classes has collapsed. In contrast…
“Asset Allocation: Risk Models for Alternative Investments” Niels Pedersen, Sébastien Page, and Fei He, Financial Analysts Journal vol. 70, no. 3 (May/June 2014): 34–45 Investors frequently use factor-based approaches to asset allocation to improve portfolio diversification and implement economic views. The characteristics of alternative asset classes, however, can make it difficult to map them to…
Foreword The impact of fossil fuels on climate change is an important topic on the minds of many investors. We have been a part of many discussions with our clients about the decision to divest fossil fuel investments. There are thoughtful and passionate arguments on both sides of the issue, and we have a deep…
Even as the European Central Bank worries about deflation, the United States has recently seen some hints of inflationary pressures. In recent weeks, a variety of inflation metrics have indicated that consumer prices rose sharply in April, surpassing consensus forecasts. Few investors can claim a distinguished record of successfully forecasting inflation—and we’re not about to…
The world is paying increasing attention to its aging population. As policymakers figure out how to deal with rising health care and pension payments, business leaders are trying to position themselves to profit from a shifting age structure. For institutional investors, the key question is how an older population will impact asset prices and the…
Today’s estimated global overhang is $909 billion net of fees, with US private equity, European private equity, and real estate the primary contributors. With capital appearing to be deployed at a slower pace than historically, the overhang is larger than expected. Too much overhang and the pressure to put capital to work before it expires…
Executive Summary To construct an effective liability hedging portfolio, a key first step is to evaluate the variety of ways liabilities can be calculated and discounted and to identify the most relevant liability metric for a plan sponsor’s circumstances. Plan sponsors should also define the acceptable level of surplus risk and carefully consider the appropriate…
Executive Summary Risk parity comprises strategies whose goal is to define a more “efficient” mix of assets that is more diversified across the risks caused by different asset classes and economic environments, and that yields a higher Sharpe ratio than more traditional approaches. In practice, risk parity aims to achieve this by balancing the volatility…