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Conor Mac
@investmenttalkMarch 3
Seven Thoughts On Running Big Money For the Long Term by AQR
A revised edition of AQR’s original (2007) memo on advice to running money for the long term. While the authors are writing with institutional money managers in mind, there are plenty of learnings that translate to that of the retail investor.
- Embrace Risk: Being truly long-term is one potential advantage for investors because it allows them to bear more near-term risk than those with shorter horizons. Setting up your portfolio to take and withstand substantial volatility without changing course is likely the leading determinant of long-term success in investing.
- To Survive LT, Brace for the ST: In general, you have to protect yourself from disaster. The way to do this is not by buying insurance, as that is almost always a sucker’s game long-term. Instead, stress-test your portfolio in advance. Statistically shocking events (“Black Swans” if you will) definitely occur. At the beta level, we all have to collectively bear them but what you can make sure of is that if it happens somewhere it does not kill you.
- Diversify Market Risk: Market risk (beta) will drive the lion’s share of long-term returns. Unfortunately, many investors under-diversify as they focus on capital allocations rather than risk allocation. Shifting to a risk budgeting framework can improve results by more clearly highlighting the true degree of concentration in certain types of risk.
- Seek Alpha in Beta: Alpha is incredibly powerful. It's also widely misunderstood. We think of alpha as source of long-term positive return with a low correlation to other available returns. We think all investors should look at the risk exposures in their portfolio and see where they can add new sources of risk for which they will be compensated. Even if these are a kind of "beta," in a portfolio context they look like (and behave like) alpha.
- Manager Alpha: Not all that relevant to retail, but the idea is to stay flexible. I liked this though: "Basically, take alpha wherever you find it rather than targeting a certain amount".
- Don’t Fear Contrarianism: Along with being contrarian, long-term investors should be able to earn a risk premium by providing liquidity when short-term opportunities present themselves. Remember that being a contrarian isn't easy. By definition, you will be going against conventional wisdom – and conventional wisdom is often based on logical judgments and real-world observations.
- Be Innovative: We can basically just re-use the "take alpha wherever you find it rather than targeting a certain amount" quote here.
Conor Mac
@investmenttalk
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