AQR Capital Management

Equity valuations matter (eventually). While equity valuations have continued to rise from already-stretched levels and recent strong stock returns have bolstered many investor portfolios, the future may not be as bright. We have written extensively on the challenges of an expensive market, with one key finding being the inverse relationship between Shiller P/E (today's price divided by average real earnings over the past decade) and next 10-year equity market returns. As of October 2024, the P/E for U.S. stocks of 37 sits at its third highest level ever (behind the Tech Bubble's peak of 46 and the pre-crash peak of 40 at the end of 2021). At a current P/E ratio of 37, the U.S. market is well within the highest decile of Shiller P/E ever realized, implying lower equity returns over the next decade. Given this market backdrop, investors may need to revisit their strategic asset allocations and consider seeking return sources beyond traditional markets. In a low return environment, adding liquid alternatives to their portfolios may offer investors better diversification and potential returns.

In the second issue of our 2024 Alternative Thinking series, we showed that machine learning techniques can be used to help improve market timing strategies. In this issue, we extend these concepts to constructing stock selection strategies following a similar framework. Our results indicate more complex models utilizing machine learning techniques yield performance improvements relative to a simple, linear approach in the range of 50-100% (see the paper for more information), suggesting that machine learning can help to build better stock selection portfolios: https://bit.ly/4hZRvkS

The recent rise and fall of SPAC issuance and the poor returns of SPAC mergers might suggest that SPACs are a flash in the pan, but this is far from the truth. To the contrary, SPACs have been a compelling asset class for more than two decades. In this paper, the AQR Arbitrage team assesses the SPAC market, its history, and its investment characteristics, including why we believe SPACs are a safe investment when managed properly, with the potential for significant upside: https://bit.ly/4fkobUs

Suppose a real estate investor is planning to sell a property that she has held for many years. Due to accumulated depreciation, the property's adjusted basis has significantly decreased. The same investor also has some realized losses on stocks. Could the investor use those losses to offset some of the gains from the sale? Our latest Tax Matters delves into this scenario: https://bit.ly/3YZaAfm

A recent post from AQR founder Cliff Asness argues that good higher-volatility alternative investments, which are indeed often very hard to stick with, can be important tools in constructing the best overall portfolio. Cliff thinks if (a big if) investors can stick with them, they are often a more effective tool than their lower-volatility cousins. Basically, he thinks they are underutilized. Read the full post: https://bit.ly/3Uj75xG

Investors have a range of tax-aware strategies to choose from, and we expect their choices to continue growing with time. Choosing among strategies is never easy, but, when it comes to anything tax-related, there’s a simple test that can be applied to separate the wheat from the chaff: Does the strategy with beneficial tax attributes make sense before tax? Read our latest Tax Matters for more: https://bit.ly/3Yv07Iz

Our latest Quick Take video covers the potential benefits of a portable alpha approach over traditional long-only active management The key takeaways: - Long-only active equity has been challenging; and -Portable Alpha may incorporate more alpha into an investors’ equity allocation

Have recent bouts of market volatility just been blips? In a recent CNBC interview, Jordan Brooks, AQR Principal and Co-Head of the Macro Strategies Group, discussed the elevated level of macroeconomic uncertainty, why it may lead to more market volatility ahead, and how diversifying liquid alternatives can help investors’ build portfolios that are more resilient to macro risks. Watch a clip of the interview after the link: https://bit.ly/4h8sDXK

As stock market valuations rise, investors should expect lower-than-average equity returns. Some may consider adding active management to the mix, but evidence supporting active long-only equities has long been underwhelming. We review an alternative approach – portable alpha – which we believe could provide investors with a simple way to add diversified, higher quality alpha to long-only mandates: https://bit.ly/3YhvUfU

Where do alternatives fit into a strategic asset allocation framework ? How should their risk and return characteristics be estimated, and how can realistic constraints be modelled? Our latest Alternative Thinking presents one justifiable set of inputs and finds that alternatives earn themselves a sizable strategic allocation: https://bit.ly/3zTII2x