Learning From AQR's "Good Strategies for Tough Times"

Composite of long/short premia, including Absolute and Relative Momentum performs well when Equities or Bonds perform poorly. Absolute Momentum is a good complement with Private Equity with negative correlation.

In this article, Absolute Momentum will be used interchangeably with trend following or time series momentum. Relative Momentum will be used interchangeably with cross-sectional momentum or relative strength.

The paper showed that global government bonds, gold and a composite of 5 long/short style premia (combination of Value, Momentum, Carry, Defensive and Trend) performed the best during the 10 worst Global Equity Quarters from 1972 to 2014. This is shown in “Exhibit 1” of the paper (reproduced below).

Good Strategies for Tough Times - AQR - exhibit 1

Source: AQR Capital Management


The paper also explored the 10 worst quarters in bond markets. “Exhibit 3” of the paper (reproduced below) shows that Equities were not good hedges when bonds performed poorly while commodities and long/short style premia, including Momentum and Trend, performed well during such periods.

Good Strategies for Tough Times - AQR - exhibit 3

Source: AQR Capital Management


While Trend Following strategies hedge Public Equities well, the paper suggests that Trend Following might be an even more effective complement with Private Equity. “Exhibit 4” of the paper (reproduced below) shows that when either Trend Following strategy or Private Equity is performing poorly, the other tends to perform well. These two asset classes are negatively correlated especially during extreme events for each.

Good Strategies for Tough Times - AQR - exhibit 4

Source: AQR Capital Management

Research Paper: Alternative Thinking Third Quarter 2015: Good Strategies for Tough Times

Authors: AQR Capital Management

Company: AQR Capital Management

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