AQR Capital Management

Diversification is a timeless strategy that helps manage risk and enhance returns. As Jordan Brooks explained during our Outlook 2025 webinar, with US equity valuations currently at high levels, now may be an especially attractive time to consider broader asset allocation. Different asset classes respond differently to various macroeconomic environments—positioning a portfolio correctly could make all the difference.

At AQR, we’re constantly trying to push the envelope on new techniques that we use to build our models, develop new signals, and express the information we have across different trading environments. During our recent 2025 Outlook webinar, Bryan Kelly, Head of Machine Learning, highlighted AQR’s innovative approach to integrating cutting-edge machine learning into our investment process. Learn more: https://bit.ly/4jNkut3

Equity market concentration and technological innovation are two hot topics for active equity investors today. This paper explores both. First, we address the challenges of investing in concentrated markets, and discuss how this environment is impacting different approaches to active management. Second, we explore the role of new technologies, such as large language models and machine learning, and alternative data sources. We argue that a systematic approach is uniquely positioned to capitalize on these shifts. Read the full paper here: https://bit.ly/3EuucjL

In January, we hosted our 2025 Outlook – Insights and Innovations webinar featuring Cliff's outlook for the year ahead. One of his key points? Equity valuations, especially in the US, highlight the increasing importance of diversification in today's market. Cliff's outlook covers this and much more. Click here to watch the full video: https://lnkd.in/eegM3YbV

As the concept of tax-aware long-short investing becomes a mainstay of private wealth planning, we wanted to clearly articulate some core findings of our research, and help parse the jargon of this rapidly growing but sometimes confusing area. Read our thinking in our latest Tax Matters: https://bit.ly/40MufyW

The US Treasury yield curve has experienced significant changes since the Fed's inflation-fighting campaign began in 2022. What happened? 1. Yield Curve Inversion – Initially, the yield curve inversion suggested that high policy rates were temporary. 2. Bull Steepening – From July to September 2024, the curve steepened, signaling expectations for imminent rate cuts. 3. Bear Steepening – Recently, the curve steepened again, but this time driven by upside risks to growth, inflation, and bond issuance from the new administration’s policies. What does all of it mean for investors? 1. Higher Returns Demanded – Bond investors are now demanding higher expected returns from long-dated Treasuries, reflecting uncertainty about future economic conditions and policy implementations. 2. Additional Margin of Safety – The steeper yield curve provides some additional margin of safety to bondholders against potential risks to growth, inflation, and budget deficits.

We’re excited to be hosting our 2025 London Forum on 13 February. The event will feature discussions with leaders from AQR and the broader industry, which will aim to address a foundational question – is history repeating itself or are we living through an era of new paradigms? Session topics will include: - The application of machine learning in finance - Investing amid an era of Mag 7 dominance - Trends in manager research and client advice - Political instability in the UK and Europe The event is for professional investors only. Please email teamuk&i@aqr.com if interested in attending.

In our 2025 Capital Market Assumptions, we update our estimates of medium-term expected returns for major asset classes. In 2024, equity markets rallied for a second consecutive year but our expected returns – based on current valuations – continue to imply risk premia are compressed. Expected returns for bonds increased, driving a rise in our expected real return of a global 60/40 portfolio (60% global developed equities, 40% global developed government bonds), but our estimate is still well below the longer-term U.S. average. We also include a discussion on corporate earnings growth: the market consensus is for more strong growth to come – especially in the U.S. But what is a reasonable medium-term forecast for allocators? See the full CMAs here: https://bit.ly/4jr3NDz

2024 was a very strong year for U.S. equities – but what does that tell investors about 2025? Irrespective of the obvious headwinds posed by market concentration, stretched valuations, and the resurgence of inflationary pressures, there is an even simpler fact about equity returns that we believe many investors may have forgotten: last year’s return is a terrible predictor of next year’s return. In the chart below, we see virtually no relationship between one year’s U.S. equity return and the next. In other words, when it comes to setting investor expectations, forgetting about what happened last year can be a helpful part of the discussion.

In his latest, Cliff pens a post from the POV of a fictional endowment manager in 2035 (with narration in the footnotes): "Well, sitting here in the year 2035 and looking back at our endowment’s returns for the last decade is not a pleasant task. World markets have been subpar and our performance relative to world markets has been simply terrible. Hard times are never pleasant. But they have one upside. We can learn from them." Read the full post: https://bit.ly/3BHVWAz