Ignore AQR, You Must Hedge Your Portfolio

The pioneering quant investment fund, founded by Cliff Asness, is grossly wrong in underestimating tail risks

It is not news that as a result of the market bursts, many gurus who predicted said stock market crash come to light, as well as an infinity of books that seem to be the panacea for investment. And that is just what Cliff proclaimed back in March 2020 when Covid had hit the S&P500 by 20%.

Asness states in a paper called ‘Portfolio Protection? It’s a Long (Term) Story… ’ that those investors who systematically hedge their portfolios lose money in the long term against the index for the payment of the Premium in the purchase of options. In contrast, risk-mitigating and diversifying strategies such as defensive equities, risk parity, alternative risk rewards, and trend-following have more consistently added value over the horizons that matter most, as well as on average.

And it is precisely in the latter that Cliff is wrong and that is those typical investment portfolios suffer from too much asset-class diversification and not enough risk diversification.

Furthermore, AQR has tried to subst…