AQR Capital Management explores whether recent underperformance in liquid alternatives signals structural failure or simply a tough cycle. The paper argues expectations may be misaligned, noting even a 0.4 Sharpe strategy can still fail over a decade. It challenges the idea that recent struggles mean these strategies are broken.
Liquid Alts Ragnarok
AQR
Cliff Asness
Research
23 Pages
Key Takeaways
Sharpe Reality Check: A 0.4 Sharpe ratio implies a 90% chance of positive returns over 10 years, yet still leaves a 10% chance of no gains over the same period.
Diversification Still Matters: Adding a low-correlation strategy can improve portfolios, with even a 5% allocation meaningfully enhancing risk-return outcomes when expected returns remain positive.
Factor Evidence Persistence: Core factors like value and momentum show efficacy across 25+ years of out-of-sample data spanning equities, bonds, currencies, and commodities.
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