Investors try to outperform their strategic asset allocation benchmarks by taking active risks. Some of these are intentional, such as active management or tactical asset allocations; but others are low-conviction or even unintentional, such as implementation lags or rebalancing decisions.
Unintentional risks can be a large part of a portfolio’s total active risk. Even if these risks don’t detract from performance, they still make an investor’s odds of outperformance lower than they otherwise could be. When it comes to beating a strategic asset allocation benchmark, reducing these unintentional active risks may be among an investor’s clearest sources of “low hanging fruit.”
About the Portfolio Solutions Group
The Portfolio Solutions Group (PSG) provides thought leadership to the broader investment community and custom analyses to help AQR clients achieve better portfolio outcomes.
We thank Alfie Brixton, Kelvin Lee, Zachary Mees, Jason Mellone and Dan Villalon for their work on this paper. We also thank April Frieda, Jeremy Getson, Pete Hecht, Antti Ilmanen, Thom Maloney, Nick McQuinn, Scott Metchick, Ashwin Thapar, and Ekin Zorer for their helpful comments.
The information contained herein is only as current as of the date indicated, and may be superseded by subsequent market events or for other reasons. The views and opinions expressed herein are those of the author and do not necessarily reflect the views of AQR Capital Management, LLC, its affiliates or its employees. This information is not intended to, and does not relate specifically to any investment strategy or product that AQR offers. It is being provided merely to provide a framework to assist in the implementation of an investor’s own analysis and an investor’s own view on the topic discussed herein. Past performance is not a guarantee of future results.