Thread by @ReformedTrader

1/ Mapping Investable Return Sources to Macro Environments (AQR)

"Style premia have less macro exposure than do asset classes. Additionally, a diversified portfolio (for asset classes and style premia) may rely less on a specific macroeconomic outcome."

aqr.com/Insights/Resea…

2/ "We must stress the limitations of this type of analysis. Any empirical result is specific to the sample period (here 1972-2013) and dependent on design choices.

"Long/short returns are scaled to target 10% annual volatility. We subtract no trading costs or fees."

3/ "The weak relation between equities & growth reflects the forward-looking nature of equity returns. The correlation between annual equity returns & our contemporaneous (*next* year's) growth indicator is 0.24 (0.50).

"Styles were positive in both up and down
environments."

4/ "The distinction between simple & partial correlations is the same as that between slope coefficients in simple & multiple regressions.

"It is difficult to find an asset class or even a style that performs well in a stagflationary (growth-down, inflation-up) environment."

5/ "Again, results might be specific to this sample or our specifications of style premia and macro environments.

"Even L/S styles can be more market-directional in certain asset classes (e.g. currency carry) than in the broadly diversified style composites we analyze here."

6/ "It is difficult to populate the upper-left quadrant on the risk graphs, with rising real yields, inflation, volatility and illiquidity all posing a challenging environment – all compounded by negative growth.

"Style premia tend to be closer to the origin in all four graphs."

7/ "The relationships we document are not predictive and thus less useful for tactical decisions than strategic ones.

"As post-WWII history is characterized by broadly benign growth and inflation, investors may have grown to consider equity-friendly conditions too complacently."

8/ Related reading:

Rate of Return on Everything

https://twitter.com/ReformedTrader/status/1259274241515483136

Strategic Allocation to Commodity Factor Premiums

https://twitter.com/ReformedTrader/status/1204964215120809985

Best Strategies for Inflationary Times

https://twitter.com/ReformedTrader/status/1379188472750071809

Can Risk Parity Outperform If Yields Rise?

https://twitter.com/ReformedTrader/status/1337205904932945921