What do you think?
Rate this book
Investing Amid Low Expected Returns: Making the Most When Markets Offer the Least
Elevate your game in the face of challenging market conditions with this eye-opening guide to portfolio management
Investing Amid Low Expected Making the Most When Markets Offer the Least provides an evidence-based blueprint for successful investing when decades of market tailwinds are turning into headwinds.
For a generation, falling yields and soaring asset prices have boosted realized returns. However, this past windfall leaves retirement savers and investors now facing the prospect of record-low future expected returns. Emphasizing this pressing challenge, the book highlights the role that timeless investment practices – discipline, humility, and patience – will play in enabling investment success. It then assesses current investor practices and the body of empirical evidence to illuminate the building blocks for improving long-run returns in today’s environment and beyond. It concludes by reviewing how to put them together through effective portfolio construction, risk management, and cost control practices.
In this book, readers will also
The common investor responses so far to the low expected return challenge Extensive empirical evidence on the critical ingredients of an effective major asset class premia, illiquidity premia, style premia, and alpha Discussions of the pros and cons of illiquid investments, factor investing, ESG investing, risk mitigation strategies, and market timing Coverage of the whole top-down investment process – throughout the book endorsing humility in tactical forecasting and boldness in diversification Ideal for institutional and active individual investors, Investing Amid Low Expected Returns is a timeless resource that enables investing with serenity even in harsher financial conditions.
Investing Amid Low Expected Making the Most When Markets Offer the Least provides an evidence-based blueprint for successful investing when decades of market tailwinds are turning into headwinds.
For a generation, falling yields and soaring asset prices have boosted realized returns. However, this past windfall leaves retirement savers and investors now facing the prospect of record-low future expected returns. Emphasizing this pressing challenge, the book highlights the role that timeless investment practices – discipline, humility, and patience – will play in enabling investment success. It then assesses current investor practices and the body of empirical evidence to illuminate the building blocks for improving long-run returns in today’s environment and beyond. It concludes by reviewing how to put them together through effective portfolio construction, risk management, and cost control practices.
In this book, readers will also
The common investor responses so far to the low expected return challenge Extensive empirical evidence on the critical ingredients of an effective major asset class premia, illiquidity premia, style premia, and alpha Discussions of the pros and cons of illiquid investments, factor investing, ESG investing, risk mitigation strategies, and market timing Coverage of the whole top-down investment process – throughout the book endorsing humility in tactical forecasting and boldness in diversification Ideal for institutional and active individual investors, Investing Amid Low Expected Returns is a timeless resource that enables investing with serenity even in harsher financial conditions.
304 pages, Kindle Edition
Published April 14, 2022
172 people are currently reading
854 people want to read
Ratings & Reviews
Friends & Following
Create a free account to discover what your friends think of this book!
Community Reviews
Displaying 1 - 23 of 23 reviews
May 27, 2022
I am hugely disappointed with this book. I suggest you not waste your money and time on it. The author writes in a complex style, trying to disguise the lack of practical ideas for the reader. I agree that the 2020s will probably be an era of low returns in the stock market. However, the recipes that he offers are unlikely to help you.
Among other things, the author advises his readers to master mean-variance portfolio optimization. I contend that you will end up more affluent if you don't even try to learn and apply this scam theory to your portfolio. At least read the paper "Pension Funds Should Never Rely on Correlation" by Ronald Lagnado and Nassim Nicholas Taleb.
The author also recommends paying attention to investment vehicles that expose you to different factors. Among those factors are the low volatility stocks, defensive stocks (value, customer staples, quality), and momentum. In recent years, all these factors have ceased working, and it is unlikely they will deliver again. Thanks to new technologies, the markets have become much more efficient. That is, nowadays, they can recalculate the fair price of every stock instantly after some updated information arrives.
A good disillusioning exercise is to plot the chart of the relative price of the S&P 500 index and various factor ETFs over the last ten years.
In conclusion, I would like to recommend several more useful books instead of this one.
1. Central Banking 101 by Joseph J Wang.
2. The Art of Currency Trading by Brent Donnelly - even if you don't trade FX, this book is too good to neglect.
3. The Five Rules for Successful Stock Investing by Pat Dorsey.
Among other things, the author advises his readers to master mean-variance portfolio optimization. I contend that you will end up more affluent if you don't even try to learn and apply this scam theory to your portfolio. At least read the paper "Pension Funds Should Never Rely on Correlation" by Ronald Lagnado and Nassim Nicholas Taleb.
The author also recommends paying attention to investment vehicles that expose you to different factors. Among those factors are the low volatility stocks, defensive stocks (value, customer staples, quality), and momentum. In recent years, all these factors have ceased working, and it is unlikely they will deliver again. Thanks to new technologies, the markets have become much more efficient. That is, nowadays, they can recalculate the fair price of every stock instantly after some updated information arrives.
A good disillusioning exercise is to plot the chart of the relative price of the S&P 500 index and various factor ETFs over the last ten years.
In conclusion, I would like to recommend several more useful books instead of this one.
1. Central Banking 101 by Joseph J Wang.
2. The Art of Currency Trading by Brent Donnelly - even if you don't trade FX, this book is too good to neglect.
3. The Five Rules for Successful Stock Investing by Pat Dorsey.
May 28, 2022
The title is very promising! But the book did not meet my high expectations.
First, its wording is rather complex, not only for a lame investor, but also for a professional one like myself. It took me a couple of weeks to read the book. Antti uses a lot of abbreviations, some of them are not very common (SR for Sharp ratio), and a lot of abbreviated titles for the charts, which really hinder my understanding of them. Most charts need definite improvements to help the reader follow the logic better.
Second, the book seems to be a collection of different thoughts and topics about investments and investing by the author, rather than one smooth narration. You can read any one chapter as an article, or read them in different order, and still lose nothing.
I still find it informative, especially the part on factor investing.
Not recommended for nonprofessional investors.
First, its wording is rather complex, not only for a lame investor, but also for a professional one like myself. It took me a couple of weeks to read the book. Antti uses a lot of abbreviations, some of them are not very common (SR for Sharp ratio), and a lot of abbreviated titles for the charts, which really hinder my understanding of them. Most charts need definite improvements to help the reader follow the logic better.
Second, the book seems to be a collection of different thoughts and topics about investments and investing by the author, rather than one smooth narration. You can read any one chapter as an article, or read them in different order, and still lose nothing.
I still find it informative, especially the part on factor investing.
Not recommended for nonprofessional investors.
November 17, 2022
Well written and analyzed book attempting to solve the issue of investing in a low return world, the world of zero rates and high equity valuations we left as the Fed raised rates. Rates and equities have readjusted to now provide a more appropriate start point, but his points are all well reasoned and I'd agree with most of the arguments. There are some points I'd take a slightly to more material differing view (on fees, hedge funds, quant/factor work). It's a worthy read regardless.
Who would have figured that a math guy mostly agrees with this quant shop book?
Who would have figured that a math guy mostly agrees with this quant shop book?
April 7, 2023
Author refers to his previous book without much context. There is a lot of acronyms without walking reader through an introduction. While the book is not intended for a broad audience, the author can do a better job explaining many points such as Sharpe ratio or briefly explain Bretton Woods for folks interested in investing under the parameters suggested. Unnecessary jargon that is not walked through by author at all; desperately needed a better editor.
Read
June 10, 2023Investing Amid Low Expected Returns: Making the Most When Markets Offer the Least - Book by Antti Ilmanen
As an investor, you’ve no doubt enjoyed the fruits of your investments since the 2008 global financial crisis. Record low interest rates have driven stock markets to new heights, leading to what renowned financial expert Antti Ilmanen calls “excess gains.” But are you prepared for the next chapter in the world of investing? Ilmanen’s insightful book reveals the reasons behind the good times and helps you navigate the inevitable changes in the market. By understanding the dynamics of changing market conditions, you’ll be better equipped to make informed decisions and safeguard your financial future.
Antti Ilmanen is principal and global co-head of the Portfolio Solutions Group at AQR Capital Management. He is the author of Expected Returns and holds a PhD in finance from the University of Chicago.
-
Investors need to adapt to a new reality.
Individual investors have adjusted their expectations of returns to reflect a climate characterized by rich asset valuations and rock-bottom bond yields. Central banks kept rates low for years, and investors reaped the rewards. The era following the 2008 financial crisis has been one of robust realized returns. But the past is not a perfect roadmap to the future, and investors would be wise to change their expectations and investment strategies. Investors are likely to see lower returns than the ones they experienced in the 2010s.
“Collectively, we are due for a disappointment, as we cannot all buck the fate of lower expected returns.”
The new reality of low returns will pose challenges for investors and savers of all stripes, from sophisticated pension funds to individuals. If returns do indeed revert to the mean, then compounding will become a less powerful force than it has been over the past few decades. The 2010s saw strong investment returns, thanks to low inflation and the growth of the FAMAG (Facebook, Apple, Microsoft, Amazon and Google) platform companies and their monopolies. But a clear pattern has emerged over history, one that sees a decade of strong returns followed by a decade of weak ones.
-
Low returns pose serious challenges for those saving for retirement.
For American workers, retirement plans fall into one of two basic categories: Defined-benefit (DB) pension plans allow someone else to worry about investment decision-making. A worker contributes a small percentage of compensation, the employer promises a future benefit, and an investment manager figures out how to make the portfolio meet the promise. But today, most workers have defined-contribution (DC) plans, which feature a much harsher calculus. It’s up to the individual not only to save for retirement but also to decide how to allocate investments. If returns languish, DB and DC savers find themselves in different scenarios. Underfunded pension plans often have to chase returns while underfunded individuals simply must work longer and save more.
“If you are an individual DC saver, you must shoulder the investment risk and the longevity risk in pension saving.”
The low-return world became especially stark in 2020 when fixed-income instruments traded at negative yields. The uncomfortable reality was clear: Taking no risk meant watching asset values decline. Investors could generate positive returns with riskier assets but with the obvious downside that adverse outcomes were a very real possibility. Some individual investors began taking risks on the equivalent of lottery tickets – they traded options or speculated on “meme stocks.” But in a world in which investments have delivered returns of 8% to 10% a year for three decades, it’s easy for investors to become complacent about risk and unrealistic about returns.
-
Past performance of equities provides no guarantee of future results.
US stocks have performed exceptionally well for a long time. From 1900 to 2020, US stocks generated real returns of 6.6%, well above the 4.5% returns of other nations’ stock markets. That strong performance includes the 84% decline in stocks during the Great Depression. Stock valuations represent the discounted value of future cash flows, and this discount rate keeps falling. That reality has contributed strongly to the large gains enjoyed by equity investors. However, there’s no guarantee that these windfall gains will continue.
“Few investment opportunities are as old as gold.”
Commodities faced headwinds in the 2010s, an era of low inflation. Perhaps the oldest commodity is gold. The precious metal continues to hold appeal as a store of value, even if it generates no cash flows or dividends. Even so, the value of all gold stores as of 2021 was $17 trillion while the much newer alternative to fiat money, cryptocurrency, was worth a combined $2 trillion in 2021. Gold tends to perform well in inflationary periods and bear markets for stocks, and it remains a favorite of investors preparing for doomsday scenarios.
-
Residential real estate offers false hope to investors seeking a magic bullet.
What about housing as a solution to savers’ investment challenges? One widely noted study in 2019 argued that residential real estate has produced long-term results similar to stocks but with less downside risk. Slicing and dicing returns from 16 nations, the authors concluded that homes returned 7.26% annually, compared to 6.67% for stocks. But the findings proved contentious. Housing experiences less volatility in part because of its illiquidity – any given property is marked to market only occasionally. What’s more, the study overlooked the inevitable decline in the quality of a house over time.
“Unfortunately, the current generation of real estate investors may extrapolate past decades’ generous returns.”
A more sober look at housing suggests that it’s no magic solution to the conundrum of low returns. While the value of the land under a house remains steady, the house itself is an ever-depreciating asset. Houses require constant repair and upkeep, and eventually they have to be torn down and rebuilt. Rental income isn’t all gravy, either – a significant portion of rental income covers the landlord’s costs, plus the intangibles of headaches from managing a property and the risk of occasional declines in real estate values.
-
Value investing has fallen on hard times.
Value investing is a contrarian strategy, one that seeks out underpriced stocks that have been overlooked by the market. Value investors focus on metrics such as book/price ratios to find bargain stocks. In other cases, investors simply buy assets that have underperformed over a given period of time, with the idea that those assets are due for a rebound. The reasons that markets undervalue certain companies are up for debate, but value investors generally believe that excess profits enjoyed by growth-stock companies ultimately will self-correct.
“Stock selection value strategies performed very poorly between 2018 and 2020, raising investor doubts about these strategies’ long-run viability.”
Value investing was a profitable pursuit for many decades, but the style fell out of favor during the 2010s. The rout was total and complete; value investing failed in all corners of the globe and across most sectors. And value-investing flops were limited not just to picks based on book/price ratios but on all types of value strategies. Growth stocks simply overpowered value stocks, seemingly ending the old debate about growth versus value as viable strategies. However, it might be too soon to rule out value investing. Markets tend to embrace the idea that “this time is different,” and yet fundamental strategies such as bargain hunting endure.
-
Investors have moved from active stock picking to passive investing.
In recent decades, low-cost index funds, and especially exchange-traded funds, have become wildly popular. Instead of attempting to pick individual stocks or hiring managers to select stocks, investors increasingly have turned to letting an index do the work for them. In 2007, passively managed mutual funds accounted for 19% of market share, according to Morningstar. By 2021, that share had risen to 50%. The tide toward index-based investing is based in part on the reality that active managers struggle to pick winners at a pace that justifies their fees.
“The conventional wisdom is that while markets are not perfectly efficient in the sense that market prices are always right, beating the market is really hard.”
Even superstar active managers owe some of their wins to the broader trends on which passive investors rely. Warren Buffett is a hugely successful value investor, and clearly his expertise is responsible for some part of his market-beating performance. But on balance, Buffett owes more of his long-term returns to mere market exposure than to his contrarian plays. George Soros has produced even less of a return beyond the usual benchmarks: His Quantum fund benefited to an even larger extent from market exposure during a time of rising asset values.
“Overall, investor choices on trading activity and on active versus passive management appear more faith-based than evidence-based.”
Still, investors seem to have embraced the low-fee ethos of passive investing a bit too exuberantly. Investors should keep their focus on maximizing returns rather than minimizing fees. The broad shift to index funds has been somewhat offset by inflows to managers of hedge funds and private equity funds, both high-fee endeavors involving active management. The most revered hedge fund managers continue to command fees of 2% of assets and 20% of performance. But there’s no question that management fees have trended sharply down. Passively run funds typically charge less than 30 basis points, while actively managed stock funds impose fees of 30 to 80 basis points.
-
Investors are rewarded by patience, and yet maintaining patience can be difficult.
Investors know that they should be patient, and yet many find it all but impossible to stay the course when markets don’t perform as they hope. Nobel laureate Daniel Kahneman delved into the behavioral issues that plague many investors. He noted that they make long-term investments but expect short-term results. When those results fail to materialize, investors lose patience. By churning in and out of investments, they all but guarantee poor returns. Many investors struggle to stay the course for even three to five years, much less for longer periods of time.
“Patience is a virtue also in investing – and one that is hard to sustain.”
Investors are wise to simply tune out performance. To return to Buffett, his Berkshire Hathaway beat the S&P 500 by an average of 9.5% per year for four decades. Yet even Buffett had three-year periods of poor performance. Indeed, Buffett’s three-year record was unimpressive fully 30% of the time. But investors who were patient and held on through such periods enjoyed stellar returns over the long term. A paradox of risk aversion is that by selling too quickly and avoiding losses, investors actually reduce their ability to meet their long-term goals. In fairness, there is such a thing as too much patience – investors can and do stick too long with poor managers or losing strategies. For the most part, though, investors would be wise to hold on through tough times and review their portfolios only sporadically.
-
Portfolio diversification amounts to the proverbial free lunch.
Properly spreading a portfolio’s holdings is a way to both boost returns and mitigate volatility. A common example is the 60-40 split of stocks versus bonds. Geographic diversity also is often overlooked; while US-heavy portfolios did well in the 2010s, it seems wise to assume that globally diversified portfolios will perform in the future. Investors should aim to diversify risk strategically rather than try to time their purchases. Sophisticated diversification strategies build in long/short plays as well. What’s more, it’s important for investors to rebalance across asset classes to prevent the best performers from dominating the portfolio.
“Many investors talk diversification but walk concentration.”
While diversification is a powerful tool, it certainly has its detractors. Some decry it as “deworsification,” or moving money out of winning asset classes into poorer performing ones. While that criticism is misguided, there are downsides to diversification. One is that sophisticated diversification strategies involve leverage, an inherently risky approach. An overlooked risk is that aggressively diversifying means you’re no longer following the crowd. If things go wrong in the portfolio, the investor can feel as if he or she is “losing alone.” What’s more, humans love stories, and diversification strategies tend to be based on statistical evidence rather than easily grasped narratives.
-
Risk gets a bad rap, but proper risk management mitigates the downside of investing.
Investors need to manage risk, an oft-misunderstood concept. For most investors, the most basic edict is survival – to make it through a major downturn, such as the 1970s stagflation or the 2008 financial crisis. Investors also need to be cautious about strategies that involve limitless downsides. These include shorting stocks and selling naked calls. Basic risk management strategies help investors rule out the most catastrophic scenarios. One hallmark of diversification and rebalancing, for instance, is limiting the size of any single position. Hedging strategies and insurance can allow investors to offset specific risks.
“Although the word risk has negative connotations, successful risk management can go beyond risk reduction and also enhance long-run returns.”
Risk isn’t all bad. For instance, leverage has a tarnished reputation because of infamous episodes such as the Long Term Capital Management crash in 1998 and Lehman Brothers’ collapse in 2008. When leverage involves risky assets, concentrated positions and illiquidity, disaster can ensue. But the truth is that leverage can help boost portfolio returns. The key is to make sure that leverage is meticulously managed so that the investor isn’t stuck with highly leveraged, illiquid assets when the market turns. Options and other flavors of risk protection allow investors to use leverage responsibly.
As an investor, you’ve no doubt enjoyed the fruits of your investments since the 2008 global financial crisis. Record low interest rates have driven stock markets to new heights, leading to what renowned financial expert Antti Ilmanen calls “excess gains.” But are you prepared for the next chapter in the world of investing? Ilmanen’s insightful book reveals the reasons behind the good times and helps you navigate the inevitable changes in the market. By understanding the dynamics of changing market conditions, you’ll be better equipped to make informed decisions and safeguard your financial future.
Antti Ilmanen is principal and global co-head of the Portfolio Solutions Group at AQR Capital Management. He is the author of Expected Returns and holds a PhD in finance from the University of Chicago.
-
Investors need to adapt to a new reality.
Individual investors have adjusted their expectations of returns to reflect a climate characterized by rich asset valuations and rock-bottom bond yields. Central banks kept rates low for years, and investors reaped the rewards. The era following the 2008 financial crisis has been one of robust realized returns. But the past is not a perfect roadmap to the future, and investors would be wise to change their expectations and investment strategies. Investors are likely to see lower returns than the ones they experienced in the 2010s.
“Collectively, we are due for a disappointment, as we cannot all buck the fate of lower expected returns.”
The new reality of low returns will pose challenges for investors and savers of all stripes, from sophisticated pension funds to individuals. If returns do indeed revert to the mean, then compounding will become a less powerful force than it has been over the past few decades. The 2010s saw strong investment returns, thanks to low inflation and the growth of the FAMAG (Facebook, Apple, Microsoft, Amazon and Google) platform companies and their monopolies. But a clear pattern has emerged over history, one that sees a decade of strong returns followed by a decade of weak ones.
-
Low returns pose serious challenges for those saving for retirement.
For American workers, retirement plans fall into one of two basic categories: Defined-benefit (DB) pension plans allow someone else to worry about investment decision-making. A worker contributes a small percentage of compensation, the employer promises a future benefit, and an investment manager figures out how to make the portfolio meet the promise. But today, most workers have defined-contribution (DC) plans, which feature a much harsher calculus. It’s up to the individual not only to save for retirement but also to decide how to allocate investments. If returns languish, DB and DC savers find themselves in different scenarios. Underfunded pension plans often have to chase returns while underfunded individuals simply must work longer and save more.
“If you are an individual DC saver, you must shoulder the investment risk and the longevity risk in pension saving.”
The low-return world became especially stark in 2020 when fixed-income instruments traded at negative yields. The uncomfortable reality was clear: Taking no risk meant watching asset values decline. Investors could generate positive returns with riskier assets but with the obvious downside that adverse outcomes were a very real possibility. Some individual investors began taking risks on the equivalent of lottery tickets – they traded options or speculated on “meme stocks.” But in a world in which investments have delivered returns of 8% to 10% a year for three decades, it’s easy for investors to become complacent about risk and unrealistic about returns.
-
Past performance of equities provides no guarantee of future results.
US stocks have performed exceptionally well for a long time. From 1900 to 2020, US stocks generated real returns of 6.6%, well above the 4.5% returns of other nations’ stock markets. That strong performance includes the 84% decline in stocks during the Great Depression. Stock valuations represent the discounted value of future cash flows, and this discount rate keeps falling. That reality has contributed strongly to the large gains enjoyed by equity investors. However, there’s no guarantee that these windfall gains will continue.
“Few investment opportunities are as old as gold.”
Commodities faced headwinds in the 2010s, an era of low inflation. Perhaps the oldest commodity is gold. The precious metal continues to hold appeal as a store of value, even if it generates no cash flows or dividends. Even so, the value of all gold stores as of 2021 was $17 trillion while the much newer alternative to fiat money, cryptocurrency, was worth a combined $2 trillion in 2021. Gold tends to perform well in inflationary periods and bear markets for stocks, and it remains a favorite of investors preparing for doomsday scenarios.
-
Residential real estate offers false hope to investors seeking a magic bullet.
What about housing as a solution to savers’ investment challenges? One widely noted study in 2019 argued that residential real estate has produced long-term results similar to stocks but with less downside risk. Slicing and dicing returns from 16 nations, the authors concluded that homes returned 7.26% annually, compared to 6.67% for stocks. But the findings proved contentious. Housing experiences less volatility in part because of its illiquidity – any given property is marked to market only occasionally. What’s more, the study overlooked the inevitable decline in the quality of a house over time.
“Unfortunately, the current generation of real estate investors may extrapolate past decades’ generous returns.”
A more sober look at housing suggests that it’s no magic solution to the conundrum of low returns. While the value of the land under a house remains steady, the house itself is an ever-depreciating asset. Houses require constant repair and upkeep, and eventually they have to be torn down and rebuilt. Rental income isn’t all gravy, either – a significant portion of rental income covers the landlord’s costs, plus the intangibles of headaches from managing a property and the risk of occasional declines in real estate values.
-
Value investing has fallen on hard times.
Value investing is a contrarian strategy, one that seeks out underpriced stocks that have been overlooked by the market. Value investors focus on metrics such as book/price ratios to find bargain stocks. In other cases, investors simply buy assets that have underperformed over a given period of time, with the idea that those assets are due for a rebound. The reasons that markets undervalue certain companies are up for debate, but value investors generally believe that excess profits enjoyed by growth-stock companies ultimately will self-correct.
“Stock selection value strategies performed very poorly between 2018 and 2020, raising investor doubts about these strategies’ long-run viability.”
Value investing was a profitable pursuit for many decades, but the style fell out of favor during the 2010s. The rout was total and complete; value investing failed in all corners of the globe and across most sectors. And value-investing flops were limited not just to picks based on book/price ratios but on all types of value strategies. Growth stocks simply overpowered value stocks, seemingly ending the old debate about growth versus value as viable strategies. However, it might be too soon to rule out value investing. Markets tend to embrace the idea that “this time is different,” and yet fundamental strategies such as bargain hunting endure.
-
Investors have moved from active stock picking to passive investing.
In recent decades, low-cost index funds, and especially exchange-traded funds, have become wildly popular. Instead of attempting to pick individual stocks or hiring managers to select stocks, investors increasingly have turned to letting an index do the work for them. In 2007, passively managed mutual funds accounted for 19% of market share, according to Morningstar. By 2021, that share had risen to 50%. The tide toward index-based investing is based in part on the reality that active managers struggle to pick winners at a pace that justifies their fees.
“The conventional wisdom is that while markets are not perfectly efficient in the sense that market prices are always right, beating the market is really hard.”
Even superstar active managers owe some of their wins to the broader trends on which passive investors rely. Warren Buffett is a hugely successful value investor, and clearly his expertise is responsible for some part of his market-beating performance. But on balance, Buffett owes more of his long-term returns to mere market exposure than to his contrarian plays. George Soros has produced even less of a return beyond the usual benchmarks: His Quantum fund benefited to an even larger extent from market exposure during a time of rising asset values.
“Overall, investor choices on trading activity and on active versus passive management appear more faith-based than evidence-based.”
Still, investors seem to have embraced the low-fee ethos of passive investing a bit too exuberantly. Investors should keep their focus on maximizing returns rather than minimizing fees. The broad shift to index funds has been somewhat offset by inflows to managers of hedge funds and private equity funds, both high-fee endeavors involving active management. The most revered hedge fund managers continue to command fees of 2% of assets and 20% of performance. But there’s no question that management fees have trended sharply down. Passively run funds typically charge less than 30 basis points, while actively managed stock funds impose fees of 30 to 80 basis points.
-
Investors are rewarded by patience, and yet maintaining patience can be difficult.
Investors know that they should be patient, and yet many find it all but impossible to stay the course when markets don’t perform as they hope. Nobel laureate Daniel Kahneman delved into the behavioral issues that plague many investors. He noted that they make long-term investments but expect short-term results. When those results fail to materialize, investors lose patience. By churning in and out of investments, they all but guarantee poor returns. Many investors struggle to stay the course for even three to five years, much less for longer periods of time.
“Patience is a virtue also in investing – and one that is hard to sustain.”
Investors are wise to simply tune out performance. To return to Buffett, his Berkshire Hathaway beat the S&P 500 by an average of 9.5% per year for four decades. Yet even Buffett had three-year periods of poor performance. Indeed, Buffett’s three-year record was unimpressive fully 30% of the time. But investors who were patient and held on through such periods enjoyed stellar returns over the long term. A paradox of risk aversion is that by selling too quickly and avoiding losses, investors actually reduce their ability to meet their long-term goals. In fairness, there is such a thing as too much patience – investors can and do stick too long with poor managers or losing strategies. For the most part, though, investors would be wise to hold on through tough times and review their portfolios only sporadically.
-
Portfolio diversification amounts to the proverbial free lunch.
Properly spreading a portfolio’s holdings is a way to both boost returns and mitigate volatility. A common example is the 60-40 split of stocks versus bonds. Geographic diversity also is often overlooked; while US-heavy portfolios did well in the 2010s, it seems wise to assume that globally diversified portfolios will perform in the future. Investors should aim to diversify risk strategically rather than try to time their purchases. Sophisticated diversification strategies build in long/short plays as well. What’s more, it’s important for investors to rebalance across asset classes to prevent the best performers from dominating the portfolio.
“Many investors talk diversification but walk concentration.”
While diversification is a powerful tool, it certainly has its detractors. Some decry it as “deworsification,” or moving money out of winning asset classes into poorer performing ones. While that criticism is misguided, there are downsides to diversification. One is that sophisticated diversification strategies involve leverage, an inherently risky approach. An overlooked risk is that aggressively diversifying means you’re no longer following the crowd. If things go wrong in the portfolio, the investor can feel as if he or she is “losing alone.” What’s more, humans love stories, and diversification strategies tend to be based on statistical evidence rather than easily grasped narratives.
-
Risk gets a bad rap, but proper risk management mitigates the downside of investing.
Investors need to manage risk, an oft-misunderstood concept. For most investors, the most basic edict is survival – to make it through a major downturn, such as the 1970s stagflation or the 2008 financial crisis. Investors also need to be cautious about strategies that involve limitless downsides. These include shorting stocks and selling naked calls. Basic risk management strategies help investors rule out the most catastrophic scenarios. One hallmark of diversification and rebalancing, for instance, is limiting the size of any single position. Hedging strategies and insurance can allow investors to offset specific risks.
“Although the word risk has negative connotations, successful risk management can go beyond risk reduction and also enhance long-run returns.”
Risk isn’t all bad. For instance, leverage has a tarnished reputation because of infamous episodes such as the Long Term Capital Management crash in 1998 and Lehman Brothers’ collapse in 2008. When leverage involves risky assets, concentrated positions and illiquidity, disaster can ensue. But the truth is that leverage can help boost portfolio returns. The key is to make sure that leverage is meticulously managed so that the investor isn’t stuck with highly leveraged, illiquid assets when the market turns. Options and other flavors of risk protection allow investors to use leverage responsibly.
August 10, 2022
Quite a long book but with a lot of really good points. Good sections on what is alpha, and also the need to give up returns for green investing
December 10, 2022
This book is a follow-up to Ilmanen's prior book, Expected Returns. Ilmanen has gotten nerdier in the decade between the two books. This book is for professional investors who want more extensive analysis than what Expected Returns provided. This review is also written for professional investors. Skip this review if you don't aspire to be one.
The Specter of Lower Investment Returns
Real interest rates have been unusually low the past decade, and reached an extreme in 2021.
Another way to phrase that is that discount rates have been unusually low.
There's been more savings than can find a way to be safely invested at at positive expected return. Investors kept some assets in bonds and money market funds even when those investments were expected to lose a bit of value, and increasingly put money into riskier startups that aren't expected to become profitable for years (Rivian, Luminar, early stage drug development companies).
Note that Ilmanen finished writing the book in 2021. Some of the low returns that he predicted happened while the book was being printed. This is especially true of bonds - Ilmanen's warning would have been very valuable a year ago. At roughly the same time as he finished writing the book, bonds started a one-year decline of more than 30%. So his advice about bonds, which was great a year ago, has become possibly obsolete today, due to bond yields that have returned somewhat close to normal. (I warned my readers about the coming bond market decline in mid-2020.)
Pension Problems
Most of the book's advice applies to a wide range of market conditions. The main recommendation that is fairly specific to recent conditions is to save more for retirement than you would in an environment of high expected returns.
Some money managers, particularly those running pension funds, are pressured to target fairly specific returns.
They usually base their target returns on realized returns for the past few decades. But the past 40 years have produced returns that were partly due to rising price/earnings ratios for stocks, and declining yields on bonds. I.e. price appreciation that is unlikely to be sustained, because the appreciation causes other sources of returns on those investments to approach zero.
Ilmanen shows that the expected long-run returns on a typical stock/bond portfolio dropped below 4% in 2021. Yet US state and local pension funds only reduced their target to 7.25%.
The most tempting strategies to earn a 7.25% return when standard strategies are expected to 4% involve taking more risk, usually with increased leverage and/or investing in illiquid assets. This has some chance of working, at the cost of making failure more dramatic. The UK recently had some sort of pension fund crisis which likely resulted from this kind of strategy. And the FTX meltdown was likely in part an extreme version of that - sometimes the only alternative to lowered expectations is increasingly desperate gambles.
Most of what investors need is the willingness to accept that sometimes it isn't possible to earn the returns that are available in normal times.
Diversify
The best parts of the book describe strategies for better diversification. He recommends using a diverse set of criteria across which we should diversify, including:
* industries
* countries
* asset classes: stock, bonds, commodities, currencies
* strategies: value, momentum, defensive, carry
* multiple signals, e.g. for value, use a mix of dividends, free cash flow, book value, etc.
"Let every man divide his money into three parts, and invest a third in land, a third in business and a third let him keep by him in reserve." - Talmud.
Patience
Investors persist in evaluating strategies using time horizons of 1 to 5 years. That creates a modest cyclical tendency for a strategy to outperform for a few years, as investors become more bullish on the strategy based on its recent good performance. Then when the strategy becomes about as crowded as it can get, that effect stops fueling the outperformance, and several years of disappointing performance cause many investors to abandon the strategy.
I still feel some temptation to follow trends that have been going on for a couple of years. My best strategy for breaking that temptation is to remind myself of the much longer-term historical evidence, by reading sources such as Ilmanen's books.
Market timing mostly doesn't work, at least for the S&P500. It keeps looking like some strategy based on Shiller's CAPE should tell us to buy at major lows and sell at major highs. Ilmanen did some rigorous testing of such strategies, using buy and sell thresholds that avoided lookahead bias, and showed that market timing did work well over the 1900-2020 period, but approximately all of the benefit came from a 30-year period that ended shortly after 1950. So a little bit of market timing is likely to be a good idea, but don't count on it working during your lifetime.
I made some good money by timing the market between September 2008 and March 2009, based on signs of macroeconomic problems and on a comparison to 1937-8. But the conditions under which I can repeat that kind of success are rare.
For most such successes, there's an offsetting mistake, such as selling when Alan Greenspan expresses concern about irrational exuberance.
Unorganized Tidbits
Why did the expected returns of US treasury bonds drop to -1% in 2021? Some of the answer is high savings rates causing plenty of capital to be available for all investments. But there's also the effect of negative bond-stock correlations in making bonds a valuable hedge for stock market risk.
Ilmanen suggests that the bond-stock correlation is negative when there's little uncertainty about inflation. "As long as inflation uncertainty remains mild, stock-bond correlation is likely to remain negative."
That provided an excellent prediction about what would trigger the kind of bond crash we saw in 2022. It's embarrassing that it was combined with a faulty view of inflation (I presume much of the book was written before the 2021 burst?? of inflation was visible).
How reliable is the equity premium? Newly compiled historical evidence say there was no equity premium in the 19th century.
The size premium is an illusion. There's an illiquidity premium, which maybe causes a slight tendency for small illiquid stocks to outperform.
Summarizing The Impact of Market Conditions on Active Equity Management:
The book has only one brief mention of cryptocurrencies, in a section about gold, implying that he thinks of cryptocurrencies as a minor subset of commodities.
Ilmanen sounds a bit strange when he strays into macroeconomics: "As long as economies are weakened by the virus and the lockdown effects or by precautionary saving, inflation pressures should be muted."
Could an AI-related acceleration of economic growth invalidate Ilmanen's forecast of low returns? Alas, the evidence is weak and confusing as to whether faster growth causes higher stock market returns. Cross-country comparisons show a negative correlation over the 20th century.
The Specter of Lower Investment Returns
Real interest rates have been unusually low the past decade, and reached an extreme in 2021.
Another way to phrase that is that discount rates have been unusually low.
There's been more savings than can find a way to be safely invested at at positive expected return. Investors kept some assets in bonds and money market funds even when those investments were expected to lose a bit of value, and increasingly put money into riskier startups that aren't expected to become profitable for years (Rivian, Luminar, early stage drug development companies).
Note that Ilmanen finished writing the book in 2021. Some of the low returns that he predicted happened while the book was being printed. This is especially true of bonds - Ilmanen's warning would have been very valuable a year ago. At roughly the same time as he finished writing the book, bonds started a one-year decline of more than 30%. So his advice about bonds, which was great a year ago, has become possibly obsolete today, due to bond yields that have returned somewhat close to normal. (I warned my readers about the coming bond market decline in mid-2020.)
Pension Problems
Most of the book's advice applies to a wide range of market conditions. The main recommendation that is fairly specific to recent conditions is to save more for retirement than you would in an environment of high expected returns.
Some money managers, particularly those running pension funds, are pressured to target fairly specific returns.
They usually base their target returns on realized returns for the past few decades. But the past 40 years have produced returns that were partly due to rising price/earnings ratios for stocks, and declining yields on bonds. I.e. price appreciation that is unlikely to be sustained, because the appreciation causes other sources of returns on those investments to approach zero.
Ilmanen shows that the expected long-run returns on a typical stock/bond portfolio dropped below 4% in 2021. Yet US state and local pension funds only reduced their target to 7.25%.
The most tempting strategies to earn a 7.25% return when standard strategies are expected to 4% involve taking more risk, usually with increased leverage and/or investing in illiquid assets. This has some chance of working, at the cost of making failure more dramatic. The UK recently had some sort of pension fund crisis which likely resulted from this kind of strategy. And the FTX meltdown was likely in part an extreme version of that - sometimes the only alternative to lowered expectations is increasingly desperate gambles.
Most of what investors need is the willingness to accept that sometimes it isn't possible to earn the returns that are available in normal times.
Diversify
We've all heard that diversification is the only free lunch in investing. But did you know that well-executed diversification is indistinguishable from magic?
The best parts of the book describe strategies for better diversification. He recommends using a diverse set of criteria across which we should diversify, including:
* industries
* countries
* asset classes: stock, bonds, commodities, currencies
* strategies: value, momentum, defensive, carry
* multiple signals, e.g. for value, use a mix of dividends, free cash flow, book value, etc.
"Let every man divide his money into three parts, and invest a third in land, a third in business and a third let him keep by him in reserve." - Talmud.
Patience
Most importantly, the fact that so many investors capitulate from almost any factor after a few years of underperformance justifies the word "risk" in alternative risk premia strategies. Wise men have said "no pain, no premium" - it is precisely the painful times that will sustain the premium and prevent it from being arbitraged away.
How would you balance disappointing performance over the past three years against positive evidence over the past century? ... Guided by ... "the law of small numbers", investors tend to expect any long-run edge to manifest itself within a short period.
Investors persist in evaluating strategies using time horizons of 1 to 5 years. That creates a modest cyclical tendency for a strategy to outperform for a few years, as investors become more bullish on the strategy based on its recent good performance. Then when the strategy becomes about as crowded as it can get, that effect stops fueling the outperformance, and several years of disappointing performance cause many investors to abandon the strategy.
I still feel some temptation to follow trends that have been going on for a couple of years. My best strategy for breaking that temptation is to remind myself of the much longer-term historical evidence, by reading sources such as Ilmanen's books.
Market timing mostly doesn't work, at least for the S&P500. It keeps looking like some strategy based on Shiller's CAPE should tell us to buy at major lows and sell at major highs. Ilmanen did some rigorous testing of such strategies, using buy and sell thresholds that avoided lookahead bias, and showed that market timing did work well over the 1900-2020 period, but approximately all of the benefit came from a 30-year period that ended shortly after 1950. So a little bit of market timing is likely to be a good idea, but don't count on it working during your lifetime.
I made some good money by timing the market between September 2008 and March 2009, based on signs of macroeconomic problems and on a comparison to 1937-8. But the conditions under which I can repeat that kind of success are rare.
For most such successes, there's an offsetting mistake, such as selling when Alan Greenspan expresses concern about irrational exuberance.
Unorganized Tidbits
Why did the expected returns of US treasury bonds drop to -1% in 2021? Some of the answer is high savings rates causing plenty of capital to be available for all investments. But there's also the effect of negative bond-stock correlations in making bonds a valuable hedge for stock market risk.
Ilmanen suggests that the bond-stock correlation is negative when there's little uncertainty about inflation. "As long as inflation uncertainty remains mild, stock-bond correlation is likely to remain negative."
That provided an excellent prediction about what would trigger the kind of bond crash we saw in 2022. It's embarrassing that it was combined with a faulty view of inflation (I presume much of the book was written before the 2021 burst?? of inflation was visible).
How reliable is the equity premium? Newly compiled historical evidence say there was no equity premium in the 19th century.
The size premium is an illusion. There's an illiquidity premium, which maybe causes a slight tendency for small illiquid stocks to outperform.
The shift to passive, as well as to ETFs and factor investing, could lead to higher correlations between single stocks and thus higher systematic risk.
Summarizing The Impact of Market Conditions on Active Equity Management:
There is also some evidence that active stock pickers tend to outperform during recessions, at times of high dispersion between stock-specific returns, and especially during "differentiated declines" - when weak markets and wide dispersion coincide.
The book has only one brief mention of cryptocurrencies, in a section about gold, implying that he thinks of cryptocurrencies as a minor subset of commodities.
Ilmanen sounds a bit strange when he strays into macroeconomics: "As long as economies are weakened by the virus and the lockdown effects or by precautionary saving, inflation pressures should be muted."
The old story of "the Fed taking away the punch bowl when the party gets going" sounds quaint in this century when the only question seems to be how much the Fed is spiking the bowl.(See Scott Sumner for a better view of the past 20 years.)
Could an AI-related acceleration of economic growth invalidate Ilmanen's forecast of low returns? Alas, the evidence is weak and confusing as to whether faster growth causes higher stock market returns. Cross-country comparisons show a negative correlation over the 20th century.
July 7, 2022
One of the best finance books I have read in some time. The author uses loads of data to provide a robust investing framework. Although low expected returns (hint: low treasury yields) are featured, this book is more broad than just that issue. I highly recommend it.
Part I: Setting the Stage
Figure 1.2 identifies 9 asset class premia that have, since 1926, delivered persistent, pervasive, and robust rewards that are statistically and economically significant: 4 asset class premia (equity, term, credit and commodities) and 5 style premia (value, momentum, carry, defensive, and trend).
Expected returns in all major asset classes have fallen to near historic lows because everything is discounted by the low yielding treasury bonds. It’s not just bond prices that move inversely to yield.
Part II: Building Blocks of Long-Run Returns
A diversified portfolio of commodity futures has historically earned 3-4% over T-bills.
US equities outperformed foreign equities, but mostly due to much faster real growth in dividends (1.9% in the US vs. near zero elsewhere). Sharpe ratios for 10-year treasuries and global government bonds were comparable to equities.
Antti previously questioned whether or not corporate bonds added value over a blend of equities and treasuries, but he says that newer research clearly answers in the affirmative. He concludes that despite a positive (0.25) correlation with equities, the credit premium has been a useful contributor to investor portfolios. High yield corporate bonds have higher returns, higher volatilities, and higher equity correlations than investment grade bonds. Based on historical experience the average breakeven spread to offset expected default losses is modest (15-25 bps) for the broad investment grade market, but much higher (200-250 bps) for the high yield market.
Commodities, with their growth and inflation exposures, are opposite to bonds. Commodities also have quite mild correlations with either stock (+) or bond (-) markets, so they are excellent diversifiers. Long-run commodity indices use front contracts and roll these to the next contract before expiry. Long-run returns to these indices can naturally be split into spot returns and roll returns. Commodity futures have a long history, although until the late 1940’s are mostly on grain products. Most of the long-run return came from the spot return, with the roll return being consistently negative. Since 1877 commodities had a long run geometric mean of 2-4% and a sharpe ratios near of 0.3.
Part III: Putting it all Together
Long/short strategies enable much more aggressive use of diversification, through shorting and leverage than long-only tilts. Antti contends that multi-metric and industry-neutral value strategies have outperformed.
Value strategies are inherently short a structural change and major value drawdowns have coincided with technological revolutions. Value and momentum work well at different horizons as many assets exhibit trending tendencies up to one-year, but mean-reverting tendencies at multiyear horizons. The negative correlation (often near -0.5) between value and momentum strategies make them great complements and near 50/50 is the implied optimal blend.
Trend-following was profitable every decade for the composite and almost without exception for each asset class. The risks for momentum and trend following come from sharp market turns and whipsawing trendless markets, respectively. Cost-effective trading execution is especially important for these high turnover strategies. Trend has performed very well in the worst equity market drawdowns, especially if they are protracted. Stock selection momentum also tends to perform well during these crashes, but there have been momentum crashes after the market has turned.
A broad definition of carry is an assets return in unchanged market conditions (yield or spread over funding rate). The best known carry trade favors high yielding short term interest rate currencies over low yielding ones. In practice this involved buying emerging market currencies and shorting developed market currencies. This strategy is significantly exposed to equity market risk and thus Antti has characterized this as “picking up pennies in front of a steam roller”.
Quality can be proxied by the bet against beta strategy, where the long side of low beta stocks are levered up and the short side of high beta stocks are levered down to produce a beta neutral strategy. If this strategy is not levered (dollar-neutral) it results in negative beta, but even so offers outperformance through diversification (risk-reduction) even if the raw returns are zero. Betting against beta has offered a higher sharpe ratio and better out of sample performance than Value and Momentum.
Risk parity investing involves taking equal risk in three or four nearly uncorrelated asset classes with similar sharpe ratios and thereby boosting the portolio sharpe ratio to 1.5 – 2x the typical single asset class sharpe ratio. Long short premia can do even better, especially if four of these styles can be applied in four or five asset classes in lowly correlated ways. Thus, portfolio sharpe ratios could plausibly be doubled by style diversification and doubled again by multi-asset applications. The math is basically square root of n, where n is number of uncorrelated investments with similar sharpe ratios.
This math only works by reducing volatility, if investors want to convert the reduced volatility to higher returns, they need to use leverage. Most practical asset allocation has shorting or leverage constraints. Relaxing these constraints is the key. Portfolio volatility declines when more assets are added but the decline is much steeper when lowly correlated investments are combined. For a single style in one asset class, the average SR was 0.4, after combining three to four styles per asset class, the average multi-style SR was 0.8. Then after diversifying across the asset classes, the all-in composite SR was 1.5, an almost four-fold increase. Importantly, this does not include trading costs or fees. Long/short style pairs have near-zero correlations to each other and multi-style composites across asset classes are also very low. These low correlations are not available when using a long-only framework.
Antti describes unlimited liabilities such as selling short a stock as particularly dangerous. Investors need to put survival first. Antti seems to support trend following as downside protection during long slow bear market, but that it is vulnerable to sudden market falls.
AQR published a study on trading/market impact costs using data from 1998-2016 and found that trades cost 9-19bps per dollar traded on average for large/small caps.
My Questions
Antti makes a compelling case for applying long/short strategies across multiple asset classes, seeming to imply a quadrupling of the Sharpe ratio. My main question is what kind of leverage this would realistically take and what borrowing costs would be for all the short positions. Antti doesn't even seem to hint at answers.
Part I: Setting the Stage
Figure 1.2 identifies 9 asset class premia that have, since 1926, delivered persistent, pervasive, and robust rewards that are statistically and economically significant: 4 asset class premia (equity, term, credit and commodities) and 5 style premia (value, momentum, carry, defensive, and trend).
Expected returns in all major asset classes have fallen to near historic lows because everything is discounted by the low yielding treasury bonds. It’s not just bond prices that move inversely to yield.
Part II: Building Blocks of Long-Run Returns
A diversified portfolio of commodity futures has historically earned 3-4% over T-bills.
US equities outperformed foreign equities, but mostly due to much faster real growth in dividends (1.9% in the US vs. near zero elsewhere). Sharpe ratios for 10-year treasuries and global government bonds were comparable to equities.
Antti previously questioned whether or not corporate bonds added value over a blend of equities and treasuries, but he says that newer research clearly answers in the affirmative. He concludes that despite a positive (0.25) correlation with equities, the credit premium has been a useful contributor to investor portfolios. High yield corporate bonds have higher returns, higher volatilities, and higher equity correlations than investment grade bonds. Based on historical experience the average breakeven spread to offset expected default losses is modest (15-25 bps) for the broad investment grade market, but much higher (200-250 bps) for the high yield market.
Commodities, with their growth and inflation exposures, are opposite to bonds. Commodities also have quite mild correlations with either stock (+) or bond (-) markets, so they are excellent diversifiers. Long-run commodity indices use front contracts and roll these to the next contract before expiry. Long-run returns to these indices can naturally be split into spot returns and roll returns. Commodity futures have a long history, although until the late 1940’s are mostly on grain products. Most of the long-run return came from the spot return, with the roll return being consistently negative. Since 1877 commodities had a long run geometric mean of 2-4% and a sharpe ratios near of 0.3.
Part III: Putting it all Together
Long/short strategies enable much more aggressive use of diversification, through shorting and leverage than long-only tilts. Antti contends that multi-metric and industry-neutral value strategies have outperformed.
Value strategies are inherently short a structural change and major value drawdowns have coincided with technological revolutions. Value and momentum work well at different horizons as many assets exhibit trending tendencies up to one-year, but mean-reverting tendencies at multiyear horizons. The negative correlation (often near -0.5) between value and momentum strategies make them great complements and near 50/50 is the implied optimal blend.
Trend-following was profitable every decade for the composite and almost without exception for each asset class. The risks for momentum and trend following come from sharp market turns and whipsawing trendless markets, respectively. Cost-effective trading execution is especially important for these high turnover strategies. Trend has performed very well in the worst equity market drawdowns, especially if they are protracted. Stock selection momentum also tends to perform well during these crashes, but there have been momentum crashes after the market has turned.
A broad definition of carry is an assets return in unchanged market conditions (yield or spread over funding rate). The best known carry trade favors high yielding short term interest rate currencies over low yielding ones. In practice this involved buying emerging market currencies and shorting developed market currencies. This strategy is significantly exposed to equity market risk and thus Antti has characterized this as “picking up pennies in front of a steam roller”.
Quality can be proxied by the bet against beta strategy, where the long side of low beta stocks are levered up and the short side of high beta stocks are levered down to produce a beta neutral strategy. If this strategy is not levered (dollar-neutral) it results in negative beta, but even so offers outperformance through diversification (risk-reduction) even if the raw returns are zero. Betting against beta has offered a higher sharpe ratio and better out of sample performance than Value and Momentum.
Risk parity investing involves taking equal risk in three or four nearly uncorrelated asset classes with similar sharpe ratios and thereby boosting the portolio sharpe ratio to 1.5 – 2x the typical single asset class sharpe ratio. Long short premia can do even better, especially if four of these styles can be applied in four or five asset classes in lowly correlated ways. Thus, portfolio sharpe ratios could plausibly be doubled by style diversification and doubled again by multi-asset applications. The math is basically square root of n, where n is number of uncorrelated investments with similar sharpe ratios.
This math only works by reducing volatility, if investors want to convert the reduced volatility to higher returns, they need to use leverage. Most practical asset allocation has shorting or leverage constraints. Relaxing these constraints is the key. Portfolio volatility declines when more assets are added but the decline is much steeper when lowly correlated investments are combined. For a single style in one asset class, the average SR was 0.4, after combining three to four styles per asset class, the average multi-style SR was 0.8. Then after diversifying across the asset classes, the all-in composite SR was 1.5, an almost four-fold increase. Importantly, this does not include trading costs or fees. Long/short style pairs have near-zero correlations to each other and multi-style composites across asset classes are also very low. These low correlations are not available when using a long-only framework.
Antti describes unlimited liabilities such as selling short a stock as particularly dangerous. Investors need to put survival first. Antti seems to support trend following as downside protection during long slow bear market, but that it is vulnerable to sudden market falls.
AQR published a study on trading/market impact costs using data from 1998-2016 and found that trades cost 9-19bps per dollar traded on average for large/small caps.
My Questions
Antti makes a compelling case for applying long/short strategies across multiple asset classes, seeming to imply a quadrupling of the Sharpe ratio. My main question is what kind of leverage this would realistically take and what borrowing costs would be for all the short positions. Antti doesn't even seem to hint at answers.
April 5, 2024
Every year, once a year, I read a finance related book. This is so I can potentially land on ideas on how to better manage my personal finances.
I chose this book as I have had a pervasive market-crash feeling since October 2020...which means I've been proven wrong by facts many years over...lollll
This doesn't change the fact that I still feel we are into a bubble of some sort. My original questions before reading this book:
- How could I improve my portfolio setup?
- Should I modify any of my behaviours?
- Am I right in thinking ESGs don't constitute the smartest choice?
I am not a technical person (clearly) and not in the industry, so quite a bit of this book went over my head and way above my comprehension. However, with regards to my first two questions: amid low expected returns I should put my focus into further portfolio diversification, I should spend less (I go out partying an awful lot), I should be happy of the money I make (even if little), and not focus on that which I don't make so I can avoid emotional decisions. I should keep reading and trying to understand things so I can always be steady in my decision making, even in rough times. Have my own code of conduct.
With regards to the ESG question, I have confirmed my doubts on ESG investing and still do not consider it. It's too broad a classification and full of contradictions, many-times-over a marketing tool, and it forces a sub-selection of assets from the wider pond you could be fishing from.
In addition to the above, I found useful learning more about the following classifications:
- Liquid assets: cash, equity, bond, credit, commodity
- Illiquid assets: real estate, private equity, private credit
- Styles: value, momentum, carry, alternatives
I have developed a better view into active management and I now understand that instead of completely dismissing it, it would likely be a worthwhile strategy if I had enough capital to pay premium money for premium service and if it is a part of a wider portfolio.
I chose this book as I have had a pervasive market-crash feeling since October 2020...which means I've been proven wrong by facts many years over...lollll
This doesn't change the fact that I still feel we are into a bubble of some sort. My original questions before reading this book:
- How could I improve my portfolio setup?
- Should I modify any of my behaviours?
- Am I right in thinking ESGs don't constitute the smartest choice?
I am not a technical person (clearly) and not in the industry, so quite a bit of this book went over my head and way above my comprehension. However, with regards to my first two questions: amid low expected returns I should put my focus into further portfolio diversification, I should spend less (I go out partying an awful lot), I should be happy of the money I make (even if little), and not focus on that which I don't make so I can avoid emotional decisions. I should keep reading and trying to understand things so I can always be steady in my decision making, even in rough times. Have my own code of conduct.
With regards to the ESG question, I have confirmed my doubts on ESG investing and still do not consider it. It's too broad a classification and full of contradictions, many-times-over a marketing tool, and it forces a sub-selection of assets from the wider pond you could be fishing from.
In addition to the above, I found useful learning more about the following classifications:
- Liquid assets: cash, equity, bond, credit, commodity
- Illiquid assets: real estate, private equity, private credit
- Styles: value, momentum, carry, alternatives
I have developed a better view into active management and I now understand that instead of completely dismissing it, it would likely be a worthwhile strategy if I had enough capital to pay premium money for premium service and if it is a part of a wider portfolio.
February 3, 2024
Way worse than his previous book Expected Returns, which was great: dense with interesting information, well supported by data, insightfully analyzed and discussed and contextualized.
There's some of that in this book, but way less. Specifically I thought:
-Not much interesting new information in this book, essentially the only things I perked up my ears at were two instances where he changed his mind: in one case he said that better data and analysis of corporate bond returns showed that they had meaningfully higher alpha than he indicated in Expected Returns, and in the second case he said that look-ahead bias made him think too highly of equity market timing based on earnings yields (although that's AQR conventional wisdom so whether it is new or not depends on how closely one is watching the field, he notes the chapter is mostly a paraphrasing of an AQR paper, fwiw in my view a very good AQR paper)
-reads way more like an AQR sales pitch. In particular I thought some of the weakest points in the book were when he was saying things that are essentially AQR selling points (e.g. less digging into possible counter-theses)
-not that it matters much, but the book was barely about "Amid Low Expected Returns" (which he notes in the conclusion), mostly it's attempting to be an update and extension of the previous work
There's a lot more about optimization, portfolio construction, and things like that in this book than in Expected Returns. I didn't happen to be in the market for a primer on that, so this was a negative for me, but depending on one's desires that could be a positive.
There's some of that in this book, but way less. Specifically I thought:
-Not much interesting new information in this book, essentially the only things I perked up my ears at were two instances where he changed his mind: in one case he said that better data and analysis of corporate bond returns showed that they had meaningfully higher alpha than he indicated in Expected Returns, and in the second case he said that look-ahead bias made him think too highly of equity market timing based on earnings yields (although that's AQR conventional wisdom so whether it is new or not depends on how closely one is watching the field, he notes the chapter is mostly a paraphrasing of an AQR paper, fwiw in my view a very good AQR paper)
-reads way more like an AQR sales pitch. In particular I thought some of the weakest points in the book were when he was saying things that are essentially AQR selling points (e.g. less digging into possible counter-theses)
-not that it matters much, but the book was barely about "Amid Low Expected Returns" (which he notes in the conclusion), mostly it's attempting to be an update and extension of the previous work
There's a lot more about optimization, portfolio construction, and things like that in this book than in Expected Returns. I didn't happen to be in the market for a primer on that, so this was a negative for me, but depending on one's desires that could be a positive.
January 9, 2025
Antti provides a very good overview of investments and investment strategies in this book. To me, it reads like an updated version of his previous book, Expected Returns (2011?).
However, as comprehensive and detailed as it may be, Antti seems to assume a readership that is familiar with financial publications/research/papers. He is also very fond of quoting from the deep bank of AQR research of his fellow colleagues. While this is not a con per se, it does exclude a wider range of readers who would be put off by the numerous academic citations that come without much background for a general understanding.
Also, I feel that this book may have become underrated due to its ambiguous and currently unappreciated title. Many investors who are experiencing the equity market surges of 2023-2025 would have been confused by the ‘low expected returns’ that Antti puts forth as it would require a deeper understanding of the returns environment. Though I do not necessarily disagree with Antti for the medium / longer term returns expectations, a better title more representative of the content would have been better (the low expected returns portion seemed to only cover a portion of the book, with more sections on the broader market).
All in all, I feel that this is a fairly good book to understand how to build a resilient portfolio and to get an understanding of the concepts that underlie investment returns. More investors should read it.
However, as comprehensive and detailed as it may be, Antti seems to assume a readership that is familiar with financial publications/research/papers. He is also very fond of quoting from the deep bank of AQR research of his fellow colleagues. While this is not a con per se, it does exclude a wider range of readers who would be put off by the numerous academic citations that come without much background for a general understanding.
Also, I feel that this book may have become underrated due to its ambiguous and currently unappreciated title. Many investors who are experiencing the equity market surges of 2023-2025 would have been confused by the ‘low expected returns’ that Antti puts forth as it would require a deeper understanding of the returns environment. Though I do not necessarily disagree with Antti for the medium / longer term returns expectations, a better title more representative of the content would have been better (the low expected returns portion seemed to only cover a portion of the book, with more sections on the broader market).
All in all, I feel that this is a fairly good book to understand how to build a resilient portfolio and to get an understanding of the concepts that underlie investment returns. More investors should read it.
December 16, 2022
What a difference such a short time makes. The book was written in the end of 2021 and a lot of predictions that author made became true. Kudos to author for saying at the end of the book that the chance of 'quick pain' (big market drop) is increasing. Future will tell if the drop has been finished but the latest events didn't diminish the value of research in this book. It's a little bit weird mix of academic research and general investment advice. It's geared more towards institutional asset managers but it's still nice to see an affirmations of certain principals that I thought about at the instinctive level. At the end of the day, the main conclusion for retail investors is diversified 'buy and hold' works, especially if you can also dip your toes into factor investing, such as combination of value and trend following. The other conclusion is that academic finance theory is such an imprecise science.
October 7, 2024
A decent albeit dry read. My notes below…
Over the long term there are only 4 factors that have consistently shown alpha: value, momentum, carry, and defensive. Of those value is the only on that looks underpriced right now.
Value works long term because it is contrarian. Momentum works short term but you have to avoid the unwind so requires higher turnover. Combining the two works long term as the momentum has a longer runway given the lower starting point.
Studies of allocators suggest poor timing in the hiring and firing of managers. Fired managers modestly outperform their hired peers after the change. Empirically the evidence for such a reversal is strongest when a manager has underperformed for 3-5yrs. This is when most managers are likely to get fired suggesting particularly poor timing. They are using a momentum strategy but this works best on a 1yr basis. Evidence of a momentum reversal is strongest at 3-5yrs
Over the long term there are only 4 factors that have consistently shown alpha: value, momentum, carry, and defensive. Of those value is the only on that looks underpriced right now.
Value works long term because it is contrarian. Momentum works short term but you have to avoid the unwind so requires higher turnover. Combining the two works long term as the momentum has a longer runway given the lower starting point.
Studies of allocators suggest poor timing in the hiring and firing of managers. Fired managers modestly outperform their hired peers after the change. Empirically the evidence for such a reversal is strongest when a manager has underperformed for 3-5yrs. This is when most managers are likely to get fired suggesting particularly poor timing. They are using a momentum strategy but this works best on a 1yr basis. Evidence of a momentum reversal is strongest at 3-5yrs
This entire review has been hidden because of spoilers.
August 26, 2025
TLDR: Lots of citations and graphs make this relatively thick book a very quick read on how to invest while the market and fixed income options decline.
If you are looking for how professional investors get small bits of edge to use when managing mid-sized portfolios, this is a good start. You can dive into the greater theory by following the citations. Some practical tips at start of every chapter help guide the reading. Can be read as individual chapters, useful for quick reference. I got 3 pages of notes and 4 new papers to read as a result of reading it. As far as the information gained to time spent reading, it was legit. It’s not an in-depth 1000 page book on the formulas used in investing, but it does exactly what the title says for a beginner investors to new professional.
If you are looking for how professional investors get small bits of edge to use when managing mid-sized portfolios, this is a good start. You can dive into the greater theory by following the citations. Some practical tips at start of every chapter help guide the reading. Can be read as individual chapters, useful for quick reference. I got 3 pages of notes and 4 new papers to read as a result of reading it. As far as the information gained to time spent reading, it was legit. It’s not an in-depth 1000 page book on the formulas used in investing, but it does exactly what the title says for a beginner investors to new professional.
May 25, 2022
My rating is based on my view as an individual investor. I should have been warned when near the start of the book it said it was written for professional investors and financial advisors. If I were one of them, I could see much more value in this book as a reference. For me, there was just mind-numbing detail that was difficult to get through. His overall points are very useful. I just didn’t need or want to wade through all the minutia.
September 26, 2022
A very minor update on the authors classic tome “Expected Returns”. The original is a must-read but the additions in this book are hardly ground breaking. I feel like the title focus on “low expected returns” was shoehorned in at the last moment for marketing purposes since barely any of the book discusses this topic.
(In fairness this is probably for the best because the markets are evolving fast and we may not be in a low E[r] regime for much longer..)
(In fairness this is probably for the best because the markets are evolving fast and we may not be in a low E[r] regime for much longer..)
July 19, 2025
If you only read one book about expected returns, this is a strong candidate. With only 250 pages, it is much more doable than most brick-like overiews of investment theory. Still, it took my sluggish brain over 9 months to finish.
The book is jam-packed with information, and the academic style of writing can feel heavy at times. Be as it may, one has to appreciate the amount of insight and thorough research it holds within. Glad that it’s over, but no regrets.
The book is jam-packed with information, and the academic style of writing can feel heavy at times. Be as it may, one has to appreciate the amount of insight and thorough research it holds within. Glad that it’s over, but no regrets.
December 15, 2022
Excellent book. Many high quality references. Though title can make it seem dated, the fundamental principles covered are timeless and worth reading for professionals and amateurs with their own savings plans alike. Highly recommend.
September 23, 2023
Admittedly, I didn’t read every page. It’s wonderfully presented but still a dauntingly deep dive for a layperson to take in. I’m considering this to be a classic reference I can turn to on an ongoing basis as needed.
June 5, 2022
Very accessible and relevant for all investors
October 17, 2023
You really have to be an industry insider to like this book. Super heavy content, but excellent if you can follow along.
May 6, 2024
Doesn't say much about low return environment in particular. Mostly reiterating other people's research.
November 23, 2022
Work to read without enough utility
Many authors even of investment books make an effort to be interesting or sometimes even fun. This book instead seeks to provide very broad information with a lot of jargon and acronyms, making it a difficult read except for those who already know the information. It's conclusions or advice are fairly weak and general, with extensive caveats. I trust this is simple honesty. But I for one do not feel particularly better advised as a result. It was work with little utility, for me.
Many authors even of investment books make an effort to be interesting or sometimes even fun. This book instead seeks to provide very broad information with a lot of jargon and acronyms, making it a difficult read except for those who already know the information. It's conclusions or advice are fairly weak and general, with extensive caveats. I trust this is simple honesty. But I for one do not feel particularly better advised as a result. It was work with little utility, for me.
Displaying 1 - 23 of 23 reviews