AQR Tests Market Timing Techniques, Helping to Boost Long Term Returns


A recent article by Cliff Asness and colleagues from AQR Capital Management challenges the academic finance recommendation to avoid attempts to time the market. “Sinning a little,” Asness and colleagues suggest, can boost returns.  Among other things, they suggested trimming exposure to stocks in October 2015, as the article went to print, by holding more cash.

The article uses two core factors – valuation, measured by the cyclically adjusted PE (CAPE) factor made known by Rober Shiller, and momentum.  Drawing on 115-year data, they found meaningful advantages to timing the market in moderation.  The article cautions against extremes, but moderately applying the value-plus-momentum strategy to an equity strategy yielded a “1.2 percentage point increase annually over a buy-and-hold portfolio” over a 115-year period and an annualized 0.8% return for a portfolio of 50/50 in stocks in bonds over that same time frame. In both tests, the strategy also materially reduced risk by lowering the max drawdown results.