Applied Quantitative Research (AQR)
Most investors have traditionally relied on only two sources of risk and return in portfolios - stocks and bonds. Alternatives seek to provide access to other sources of risk and return, with the potential benefits of reducing the risk of an investor's overall portfolio, improving returns, or both. Historically, many alternative strategies have also helped investors reduce losses in weak economic environments, providing additional portfolio benefits. For example, alternative investment strategies outperformed the stock market during stress periods including the "tech bubble" (January 1999 - March 2000), the following "tech bust" (April 2000 - July 2002) and the global financial crisis (July 2007 - March 2009).1
Pension plans, endowments and foundations were among the pioneers in alternative investing and have used alternatives in portfolios for decades. High-net-worth individuals have increasingly allocated a portion of their portfolios to alternatives. Recently, many hedge fund strategies have been made available for mutual fund investors. These "liquid alternatives" offer lower minimum investments, daily liquidity and transparency while eliminating the performance fees typically charged by hedge funds. However, there are hundreds of newly created alternative mutual funds with little performance history, high fees and varying strategies. Many will underperform and likely not survive. Choosing the right strategy and the right management firm is critically important.
Our preference is to utilize a multi-strategy approach to constructing an alternatives allocation that provides exposure to a set of core strategies designed to capture a broad range of market opportunities. This multi-faceted approach is an efficient way to capture alternative returns. We work closely with AQR Capital Management, a leading global investment management firm that employs a disciplined and analytical research process using macroeconomic and fundamental data. AQR was founded in 1998 and launched its first mutual funds in 2009. The firm has offices Boston, Chicago, Los Angeles, London and Sydney and manages $135B (as of September 2015) on behalf of its clients, including pension funds, insurance companies, foundations and sovereign wealth funds. AQR provides access to its lower cost institutional share class funds for Talis clients without the $5M minimum investment required for individuals. The firm was one of the first hedge fund managers to voluntarily register at its inception with the Securities and Exchange Commission (SEC). In 2015, AQR established the AQR Asset Management Institute at The London Business School and the firm sponsors The AQR Insight Award, an annual $100K award honoring unpublished papers that provide the most significant investment insights and most innovative approaches to the real-world challenges that investors face.
Our Investment Philosophy states that we consider exposing portfolios to premia that can be reliably captured in a portfolio design and used to increase expected returns. This requires that a premium be persistent (it must perform over long time periods), pervasive (it must perform across markets and asset classes) and that it should be supported by empirical evidence and have a sensible basis in financial economic theory. Historically, we have considered risk-based premia (equity, size, relative value) and we continue to emphasize those exposures in the equity allocation within portfolios. Alternative strategies are similarly grounded in financial economic theory, but are based primarily on behavioral economic theories and the well-documented associated investor biases.
We believe that an alternatives allocation can benefit many different types of investor and may be particularly appropriate for those that are uncomfortable with the amount of equity risk otherwise required to meet future goals or that are (or should be) concerned about sequence of return risk before or during retirement. We strongly encourage you to discuss this with your advisor to develop an understanding of the benefits and tradeoffs involved.
Contact us to learn more about how Talis Advisors can help you with your financial goals and wealth management needs at 972-378-1795 or by emailing us at firstname.lastname@example.org.
1Past performance does not guarantee future performance. Alternatives are defined as the Dow Jones Credit Suisse Hedge Fund Index. Stocks are defined as the S&P 500 Index. Sources: Dow Jones/Credit Suisse, Applied Quantitative Research.