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In a paper last month called "In praise of high-volatility alternatives," Cliff Asness, founder, managing principal and CIO at AQR Capital Management, challenges the common belief that volatility is always a drag on portfolio returns by focusing on "line-item" investments, like alternative assets, which are often small, diversifying components of a portfolio. He argues that while volatility negatively affects compound returns on an entire portfolio, the same isn't true for smaller, uncorrelated line items. High-volatility alternatives, if managed well, can actually improve portfolio efficiency due to their potential for higher returns.
Using a long-short market-neutral equity example, Asness explains how leveraging volatile but uncorrelated investments can enhance returns without needing significant capital. This approach makes high-vol investments "capital efficient," as fewer dollars invested in these assets can still significantly impact the portfolio's risk-return profile. The key, however, is rebalancing regularly to avoid excessive exposure during adverse periods, as well as mentally preparing for possible large swings i...................... To view our full article Click here
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