Why Diversify?

Traditional markets have been uncharacteristically kind to investors over the last decade.

Over the past few decades markets have gone from somewhat expensive, to historically expensive. This, along with unusually benign macro conditions, led to windfall gains with unusually low risk for traditional asset classes. Additionally, negative stock/bond correlations allowed investors to rely on bond investments for portfolio protection when equities struggled. 

 

The next decade is likely to be a sharp departure.

Based on AQR’s capital market assumptions 1 1 Close View AQR’s 2022 Capital Market Assumptions for equity markets, government bonds, credit indices, commodities, alternative risk premia, private equity, real estate and cash here. , going forward, assets that rely on strong capital markets are unlikely to deliver as investors have come to expect. Even with losses in stock and bond markets year-to-date, expected returns remain low. Inflation risk has also contributed to stocks and bonds becoming less diversifying to each other, leading many portfolios to offer not only lower returns, but also higher risk than investors have become accustomed to.

Expected returns for many asset classes are now at historic lows.

How can investors respond to the changing market environment?

AQR believes that diversification is the most practical option for adapting to the changing economic environment—specifically adding sources of returns that are currently underrepresented or altogether absent in most portfolios. Crucially, such strategies should not rely on bull markets for success. Liquid alternatives seek returns that are independent from stock and bond markets, so a strategic allocation may help diversify a portfolio when these traditional assets struggle. 

Diversification has always been a key tenet of portfolio management, but investors may find it even more essential going forward. 

The benefits of diversification can grow over time, especially during challenging periods

Growth of $10,000
January 1, 1990 - May 31, 2022

Disclosures

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.

 

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.

© AQR Funds are distributed by ALPS Distributors, Inc. AQR Capital Management, LLC is the Investment Manager of the Funds and a federally registered investment adviser. ALPS Distributors is not affiliated with AQR Capital Management. 

Investors should carefully consider the investment objectives, risks, charges and expenses of the Funds before investing. To obtain a prospectus containing this and other important information, please call 1-866-290-2688 or click here to view or download a prospectus online. Read the prospectus carefully before you invest. 

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 hereOne 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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