Adding diversifying strategies such as alternative investments to a traditional portfolio of stocks and bonds can help increase the likelihood of achieving an investor’s long-term goals. That’s because alternative strategies, such as long/short or market neutral strategies, often have a low correlation with the broader stock and bond markets. In fact, a more diversified portfolio comprised of 40% stocks/40% bonds/20% alternatives has outperformed the traditional 60% stocks/40% bonds portfolio 79% of the time over rolling 15-year periods since 1990.
The Benefits of Diversification Can Grow Over Time, Especially in Challenging Times
PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE PERFORMANCE. DIVERSIFICATION DOES NOT ELIMINATE THE RISK OF EXPERIENCING INVESTMENT LOSSES. Rationale for the 40/40/20 Stock/Bond/Alternatives Portfolio: In order to demonstrate the risk reduction potential of alternatives, equities was chosen as the funding source. To approximately achieve a 2 percentage point drop in volatility (risk), a 20% allocation to alternatives was chosen, resulting in a 40/40/20 portfolio allocation. The table below reports the results for two alternate allocations, 45/40/15 (less alternatives) and 35/40/25 (more alternatives) to illustrate the sensitivity of the results.
Drawdowns: A drawdown is a peak-to-trough decline during a specific period. Approximate periods for the drawdown events referenced:Early ‘90’s Recession: July 1, 1990 – March 31, 1991
Tech Bubble Burst: April 1, 2000 – February 28, 2003
Global Financial Crisis: December 1, 2007 – June 30, 2009
The MSCI World Index is a free float-adjusted market capitalization index that is designed to measure the large and mid cap equity market performance of 23 developed countries. The Bloomberg Barclays U.S. Aggregate Bond Index, which until August 24, 2016 was called the Barclays Capital Aggregate Bond Index, and which until November 3, 2008 was called the “Lehman Aggregate Bond Index,” is a broad base index, maintained by Bloomberg L.P. since August 24, 2016, and prior to then by Barclays which took over the index business of the now defunct Lehman Brothers, and is often used to represent investment grade bonds being traded in United States. Index funds and exchange-traded funds are available that track this bond index. The HFRI Fund Weighted Composite Index is a global, equal-weighted index of over 1,500 single-manager funds that report to HFR Database. Constituent funds report monthly net of all fees performance in US Dollar and have a minimum of $50 Million under management or a twelve (12) month track record of active performance. The HFRI Fund Weighted Composite Index does not include Funds of Hedge Funds. One cannot invest directly in an index.
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The information provided herein (including any separate documents that may be accessed through this website) is not directed at any investor or category of investors and is provided solely as general information about our products and services and to otherwise provide general investment education. No information contained herein should be regarded as a suggestion to engage in or refrain from any investment-related course of action as none of AQR Capital Management, LLC (“AQR Capital”) nor any of its affiliates is undertaking to provide investment advice, act as an adviser to any plan or entity subject to the Employee Retirement Income Security Act of 1974, as amended, individual retirement account or individual retirement annuity, or give advice in a fiduciary capacity with respect to the materials presented herein. If you are an individual retirement investor, contact your financial advisor or other fiduciary unrelated to AQR about whether any given investment idea, strategy, product or service described herein may be appropriate for your circumstances.
Diversification does not eliminate the risk of experiencing investment loss. There are risks involved with investing including the possible loss of principal.
View definitions of benchmarks and other terms used here. One cannot invest directly in an index.
There are risks involved with investing including the possible loss of principal.
Past performance does not guarantee future results.
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