ANTTI ILMANEN, PHD, is Principal and Global Co-head of the Portfolio Solutions Group at AQR Capital Management. He advises institutional investors and develops AQR’s high-level investment ideas. He is the author of Expected Returns and a recipient of the Graham and Dodd award, the Harry M. Markowitz Special Distinction Award, and multiple Bernstein Fabozzi/Jacobs Levy awards.

• Foreword by Cliff Asness xiiiPart I: Setting the Stage 1Chapter 1 Introduction 31.1. Serenity Prayer and Low Expected Returns 31.2. Outline of This Book 61.3. On Investment Beliefs 11Chapter 2 The Secular Low Expected Return Challenge 152.1. Broad Context 152.2. Rearview-Mirror Expectations, Discount Rate Effect, and Low Expected Returns 172.3. How Low Are “Riskless” Long-term Yields from a Historical Perspective? 212.4. Decadal Perspective on Investment Returns 24Chapter 3 Major Investor Types and Their Responses to This Challenge 273.1. Three Broad Investor Types 283.2. History of Institutional Asset Allocation 333.3. How Has the Low Expected Return Challenge Hurt Various Investor Types? 423.4. How Are Investors Responding to the Low Expected Return Challenge? 45Part II: Building Blocks of Long-Run Returns 49Chapter 4 Liquid Asset Class Premia 514.1. Riskless Cash Return 524.2. Equity Premium 554.3. Bond Risk Premium 694.4. Credit Premium 744.5. Commodity Premium 81Chapter 5 Illiquidity Premia 875.1. Illiquid Alternative/Private Assets 885.2. Less Liquid Public Assets 1015.3. Liquidity Provision Strategies 102Chapter 6 Style Premia 1056.1. Value and Other Contrarian Strategies 1096.2. Momentum and Other Extrapolative Strategies 1176.3. Carry and Other Income Strategies 1246.4. Defensive and Other Low-Risk/ Quality Strategies 131Chapter 7 Alpha and Its Cousins 1397.1. Alpha and Active Returns 1397.2. Reviewing the Classification of Portfolio Return Sources 1467.3. Demystifying Hedge Funds, Superstars, and Other Active Managers 147Chapter 8 Theories Explaining Long-run Return Sources 1518.1. Rational Reward for Risk or Irrational Mispricing? 1528.2. “Bad Returns in Bad Times” at the Heart of Risk Premia 1538.3. Other Core Ideas for Rational Risk Premia and Behavioral Premia 1558.4. Who Is on the Other Side? – and Related Crowding Concerns 158Chapter 9 Sustaining Conviction and Patience on Long-run Return Sources 1639.1. Patience: Sustaining Conviction When Faced with Adversity 1649.2. Economic Rationale – and Has the World Changed? 1699.3. Empirical Evidence – and Data Mining Concern 170Chapter 10 Four Equations and Predictive Techniques 17310.1. Four Key Equations and Some Extensions 17310.2. Overview of Predictive Techniques 180Part III: Putting It all Together 185Chapter 11 Diversification – Its Power and Its Dark Sides 18711.1. Outline of the Remainder of This Book 18711.2. Ode to Diversification 18811.3. Critics’ Laments 193Chapter 12 Portfolio Construction 19512.1. Top-down Decisions on the Portfolio 19512.2. Mean-variance Optimization Basics and Beyond 20012.3. Pitfalls with MVO and How to Deal with Them 204Chapter 13 Risk Management 20713.1. Broad Lens and Big Risks 20813.2. Techniques for Managing Investment Risk 20913.3. Managing Tail Risks: Contrasting Put and Trend Strategies 21013.4. Managing Market Risks: Portfolio Volatility and Beyond 214Chapter 14 ESG Investing 21914.1. Booming ESG 22014.2. How Does ESG Affect Returns? 22114.3. ESG Impact of ESG Investing – a Case Study on Climate Change 224Chapter 15 Costs and Fees 22515.1. Trading Costs 22615.2. Asset Management Fees 230Chapter 16 Tactical Timing on Medium-term Expected Returns 23516.1. Contrarian Timing of the US Equity Market 23516.2. Beyond Contrarian Timing of Equities: Other Assets and Factors, Other Predictors 240Chapter 17 Bad Habits and Good Practices 24317.1. Multiyear Return Chasing 24417.2. Other Bad Habits and Good Practices 246Chapter 18 Concluding Remarks 249Acknowledgments 253Author Bio 255Acronyms 257References 259Index 277Boxes3.1 Global Market Portfolio 394.1 A Brief History of Inflation 544.2 Weak Empirical Relationship Between GDP Growth and Equity Returns 675.1 Share of Illiquid Assets in Global Wealth 895.2 Calendar Strategies 1036.1 The Size Premium 1077.1 Systematic Versus Discretionary Investing 1428.1 How to Make Sense of Flow Data When Every Buyer Has a Seller 16110.1 Machine Learning 18311.1 Rebalancing 19212.1 Modern Portfolio Theory and Two-Fund Separation 20213.1 Can Risk Management Enhance Returns? Volatility Targeting 21615.1 Taxes 233

ANTTI ILMANEN, PHD, is Principal and Global Co-head of the Portfolio Solutions Group at AQR Capital Management. He advises institutional investors and develops AQR’s high-level investment ideas. He is the author of Expected Returns and a recipient of the Graham and Dodd award, the Harry M. Markowitz Special Distinction Award, and multiple Bernstein Fabozzi/Jacobs Levy awards.

• Foreword by Cliff Asness xiiiPart I: Setting the Stage 1Chapter 1 Introduction 31.1. Serenity Prayer and Low Expected Returns 31.2. Outline of This Book 61.3. On Investment Beliefs 11Chapter 2 The Secular Low Expected Return Challenge 152.1. Broad Context 152.2. Rearview-Mirror Expectations, Discount Rate Effect, and Low Expected Returns 172.3. How Low Are “Riskless” Long-term Yields from a Historical Perspective? 212.4. Decadal Perspective on Investment Returns 24Chapter 3 Major Investor Types and Their Responses to This Challenge 273.1. Three Broad Investor Types 283.2. History of Institutional Asset Allocation 333.3. How Has the Low Expected Return Challenge Hurt Various Investor Types? 423.4. How Are Investors Responding to the Low Expected Return Challenge? 45Part II: Building Blocks of Long-Run Returns 49Chapter 4 Liquid Asset Class Premia 514.1. Riskless Cash Return 524.2. Equity Premium 554.3. Bond Risk Premium 694.4. Credit Premium 744.5. Commodity Premium 81Chapter 5 Illiquidity Premia 875.1. Illiquid Alternative/Private Assets 885.2. Less Liquid Public Assets 1015.3. Liquidity Provision Strategies 102Chapter 6 Style Premia 1056.1. Value and Other Contrarian Strategies 1096.2. Momentum and Other Extrapolative Strategies 1176.3. Carry and Other Income Strategies 1246.4. Defensive and Other Low-Risk/ Quality Strategies 131Chapter 7 Alpha and Its Cousins 1397.1. Alpha and Active Returns 1397.2. Reviewing the Classification of Portfolio Return Sources 1467.3. Demystifying Hedge Funds, Superstars, and Other Active Managers 147Chapter 8 Theories Explaining Long-run Return Sources 1518.1. Rational Reward for Risk or Irrational Mispricing? 1528.2. “Bad Returns in Bad Times” at the Heart of Risk Premia 1538.3. Other Core Ideas for Rational Risk Premia and Behavioral Premia 1558.4. Who Is on the Other Side? – and Related Crowding Concerns 158Chapter 9 Sustaining Conviction and Patience on Long-run Return Sources 1639.1. Patience: Sustaining Conviction When Faced with Adversity 1649.2. Economic Rationale – and Has the World Changed? 1699.3. Empirical Evidence – and Data Mining Concern 170Chapter 10 Four Equations and Predictive Techniques 17310.1. Four Key Equations and Some Extensions 17310.2. Overview of Predictive Techniques 180Part III: Putting It all Together 185Chapter 11 Diversification – Its Power and Its Dark Sides 18711.1. Outline of the Remainder of This Book 18711.2. Ode to Diversification 18811.3. Critics’ Laments 193Chapter 12 Portfolio Construction 19512.1. Top-down Decisions on the Portfolio 19512.2. Mean-variance Optimization Basics and Beyond 20012.3. Pitfalls with MVO and How to Deal with Them 204Chapter 13 Risk Management 20713.1. Broad Lens and Big Risks 20813.2. Techniques for Managing Investment Risk 20913.3. Managing Tail Risks: Contrasting Put and Trend Strategies 21013.4. Managing Market Risks: Portfolio Volatility and Beyond 214Chapter 14 ESG Investing 21914.1. Booming ESG 22014.2. How Does ESG Affect Returns? 22114.3. ESG Impact of ESG Investing – a Case Study on Climate Change 224Chapter 15 Costs and Fees 22515.1. Trading Costs 22615.2. Asset Management Fees 230Chapter 16 Tactical Timing on Medium-term Expected Returns 23516.1. Contrarian Timing of the US Equity Market 23516.2. Beyond Contrarian Timing of Equities: Other Assets and Factors, Other Predictors 240Chapter 17 Bad Habits and Good Practices 24317.1. Multiyear Return Chasing 24417.2. Other Bad Habits and Good Practices 246Chapter 18 Concluding Remarks 249Acknowledgments 253Author Bio 255Acronyms 257References 259Index 277Boxes3.1 Global Market Portfolio 394.1 A Brief History of Inflation 544.2 Weak Empirical Relationship Between GDP Growth and Equity Returns 675.1 Share of Illiquid Assets in Global Wealth 895.2 Calendar Strategies 1036.1 The Size Premium 1077.1 Systematic Versus Discretionary Investing 1428.1 How to Make Sense of Flow Data When Every Buyer Has a Seller 16110.1 Machine Learning 18311.1 Rebalancing 19212.1 Modern Portfolio Theory and Two-Fund Separation 20213.1 Can Risk Management Enhance Returns? Volatility Targeting 21615.1 Taxes 233

ANTTI ILMANEN, PHD, is Principal and Global Co-head of the Portfolio Solutions Group at AQR Capital Management. He advises institutional investors and develops AQR’s high-level investment ideas. He is the author of Expected Returns and a recipient of the Graham and Dodd award, the Harry M. Markowitz Special Distinction Award, and multiple Bernstein Fabozzi/Jacobs Levy awards.

• Foreword by Cliff Asness xiiiPart I: Setting the Stage 1Chapter 1 Introduction 31.1. Serenity Prayer and Low Expected Returns 31.2. Outline of This Book 61.3. On Investment Beliefs 11Chapter 2 The Secular Low Expected Return Challenge 152.1. Broad Context 152.2. Rearview-Mirror Expectations, Discount Rate Effect, and Low Expected Returns 172.3. How Low Are “Riskless” Long-term Yields from a Historical Perspective? 212.4. Decadal Perspective on Investment Returns 24Chapter 3 Major Investor Types and Their Responses to This Challenge 273.1. Three Broad Investor Types 283.2. History of Institutional Asset Allocation 333.3. How Has the Low Expected Return Challenge Hurt Various Investor Types? 423.4. How Are Investors Responding to the Low Expected Return Challenge? 45Part II: Building Blocks of Long-Run Returns 49Chapter 4 Liquid Asset Class Premia 514.1. Riskless Cash Return 524.2. Equity Premium 554.3. Bond Risk Premium 694.4. Credit Premium 744.5. Commodity Premium 81Chapter 5 Illiquidity Premia 875.1. Illiquid Alternative/Private Assets 885.2. Less Liquid Public Assets 1015.3. Liquidity Provision Strategies 102Chapter 6 Style Premia 1056.1. Value and Other Contrarian Strategies 1096.2. Momentum and Other Extrapolative Strategies 1176.3. Carry and Other Income Strategies 1246.4. Defensive and Other Low-Risk/ Quality Strategies 131Chapter 7 Alpha and Its Cousins 1397.1. Alpha and Active Returns 1397.2. Reviewing the Classification of Portfolio Return Sources 1467.3. Demystifying Hedge Funds, Superstars, and Other Active Managers 147Chapter 8 Theories Explaining Long-run Return Sources 1518.1. Rational Reward for Risk or Irrational Mispricing? 1528.2. “Bad Returns in Bad Times” at the Heart of Risk Premia 1538.3. Other Core Ideas for Rational Risk Premia and Behavioral Premia 1558.4. Who Is on the Other Side? – and Related Crowding Concerns 158Chapter 9 Sustaining Conviction and Patience on Long-run Return Sources 1639.1. Patience: Sustaining Conviction When Faced with Adversity 1649.2. Economic Rationale – and Has the World Changed? 1699.3. Empirical Evidence – and Data Mining Concern 170Chapter 10 Four Equations and Predictive Techniques 17310.1. Four Key Equations and Some Extensions 17310.2. Overview of Predictive Techniques 180Part III: Putting It all Together 185Chapter 11 Diversification – Its Power and Its Dark Sides 18711.1. Outline of the Remainder of This Book 18711.2. Ode to Diversification 18811.3. Critics’ Laments 193Chapter 12 Portfolio Construction 19512.1. Top-down Decisions on the Portfolio 19512.2. Mean-variance Optimization Basics and Beyond 20012.3. Pitfalls with MVO and How to Deal with Them 204Chapter 13 Risk Management 20713.1. Broad Lens and Big Risks 20813.2. Techniques for Managing Investment Risk 20913.3. Managing Tail Risks: Contrasting Put and Trend Strategies 21013.4. Managing Market Risks: Portfolio Volatility and Beyond 214Chapter 14 ESG Investing 21914.1. Booming ESG 22014.2. How Does ESG Affect Returns? 22114.3. ESG Impact of ESG Investing – a Case Study on Climate Change 224Chapter 15 Costs and Fees 22515.1. Trading Costs 22615.2. Asset Management Fees 230Chapter 16 Tactical Timing on Medium-term Expected Returns 23516.1. Contrarian Timing of the US Equity Market 23516.2. Beyond Contrarian Timing of Equities: Other Assets and Factors, Other Predictors 240Chapter 17 Bad Habits and Good Practices 24317.1. Multiyear Return Chasing 24417.2. Other Bad Habits and Good Practices 246Chapter 18 Concluding Remarks 249Acknowledgments 253Author Bio 255Acronyms 257References 259Index 277Boxes3.1 Global Market Portfolio 394.1 A Brief History of Inflation 544.2 Weak Empirical Relationship Between GDP Growth and Equity Returns 675.1 Share of Illiquid Assets in Global Wealth 895.2 Calendar Strategies 1036.1 The Size Premium 1077.1 Systematic Versus Discretionary Investing 1428.1 How to Make Sense of Flow Data When Every Buyer Has a Seller 16110.1 Machine Learning 18311.1 Rebalancing 19212.1 Modern Portfolio Theory and Two-Fund Separation 20213.1 Can Risk Management Enhance Returns? Volatility Targeting 21615.1 Taxes 233