Cliff Asness: This is a ten-year asset allocation review written in 2035

Standing at the beginning of 2025 and looking back at the various events in the market in 2024, people may avoid many mistakes. A review of asset allocation from 2035 may also help investors avoid many current errors.

On January 2, Cliff Asness, a leading figure in the field of quantitative investment and founder and Chief Investment Officer of AQR Capital Management, "traveled" to 2035 to publish an asset allocation review, reflecting on the asset performance over the past decade (2025-2035).

What happened in this decade? Cliff Asness stated:

The high valuation of U.S. stocks has come at a cost, with the annualized return over the past decade only a few percentage points higher than cash; U.S. bonds have also suffered from high inflation, and the large-scale public spending and the resulting debt and deficits have only just begun to be reflected in bond yields.

The real return rate of non-U.S. stocks reached 5-6%, and European stocks rose to a more reasonable range, with some having "perfectly" missed out on European stocks;

Private equity underperformed public market stocks, even if prices were disclosed to investors only occasionally, leveraged equity is still equity, and private equity cannot avoid being valued at market prices, unable to remain detached from the market environment for the long term.

The fervent cryptocurrency investors experienced painful lessons. The price of Bitcoin dropped from $100,000 to $10,000, and the idea that valuable things could be created just by running a computer for a long time is foolish.

Active management also performed poorly, with wrong management styles and managers chosen, as well as neglecting effective traditional value investment strategies; in alternative investments, abandoning strategies such as trend following, tail hedging, and risk parity investing was a mistake, along with errors in traditional hedge fund allocations.

The following is the full review:

Looking back at the investment returns of the past decade in 2035, we must confront an unpleasant experience. The global market performed poorly, and U.S. stocks performed even worse compared to the global market. However, difficult times also provide opportunities for learning.

Private equity occupied a significant portion of our portfolio, but its performance did not stabilize as expected. Although we had high hopes, the result was that private equity's performance was on par with, or even worse than, public markets. The high risk and low return of private equity left us greatly disappointed, contrasting sharply with the performance of private equity over the past 30 years.

U.S. Stocks: The Cost of High Valuation

The experience of investing in U.S. stocks has been disappointing. Despite investing at a cyclically adjusted price-to-earnings ratio (CAPE) of over 30, the final returns were far below expectations. Today, the CAPE has fallen to about 20, still above the long-term average. Despite strong and continuous earnings growth, the annualized return of U.S. stocks over the past decade was only a few percentage points higher than cash, which clearly does not meet our expectations.

Bond Market: Slowly Adapting to Inflation

Over the past decade, the inflation rate has stabilized between 3-4%, and the real return on U.S. bonds has been below historical averages. This has not been a complete disaster, appearing relatively robust compared to the performance of U.S. stocks. As public spending and deficits increased, bond yields began to reflect these risks The market still has confidence in the future, but the attractiveness of bonds remains limited.

In other words, inflation has maintained its inertia, averaging slightly above the central bank's target. Fortunately, bond yields have reacted in advance, providing some buffer for potential risks, and it seems that large-scale public spending and the resulting debt and deficits have only just begun to be reflected in bond yields.

This likely reflects the fiscal situation, with real yields now higher than they were ten years ago, but not yet at a particularly dangerous level. The market (and we) are very confident that this will not be a major issue in the future (it will never be). But then again, who cares about these things? Bonds are boring.

International Stocks: The Success of Diversification

Surprisingly, the international stock market has performed well over the past decade, with real returns on non-U.S. stocks reaching 5-6%. This confirms our view that the U.S. indeed has the best companies (highest profits, most innovative, fastest growth), and this situation has persisted over the past decade. However, it is worth noting that the high valuation issue of U.S. stocks is more pronounced compared to the global market.

And international diversification, as we know, will eventually pay off. It turns out that European stocks do indeed have a reasonable price. Fortunately, we excluded non-U.S. stocks from our benchmark at the beginning of 2025, avoiding the impact of this discrepancy on our benchmark relative performance, which only affected our actual performance.

Private Equity: The Gap Between Expectations and Reality

The performance of U.S. public market stocks has been poor, which is our entire equity benchmark for 2025, and we previously knew that the public stock market can sometimes be very volatile. To be honest, we had hoped that our substantial (which at its peak accounted for half of the portfolio) private equity allocation would better withstand this volatility.

But unfortunately, unexpectedly, even just occasionally disclosing prices to investors (and the prices do not fluctuate much when you disclose them), leveraged equity is still equity. More disappointingly, if private equity had performed like equity, that would be one thing, but they have also underperformed the public market! Ultimately, after experiencing a decade of disappointing market performance, even private equity cannot avoid being valued at market prices, unable to remain insulated from the market environment in the long term.

We really did not anticipate this poor performance, after all, in the previous 30 years, the internal rate of return (IRR) of private equity was much higher than the total return of public equity. We did not foresee that this excess return would reverse. I mean, what better way is there to estimate what will happen in the future than to look at what has happened in the past?!

One very subtle signal we missed is that, like us, every asset allocator in the world loves private equity precisely because they seem to never experience significant downturns—even when the stock market is crashing. The "washed-out" volatility makes life more enjoyable and investing easier to endure! Unfortunately, it turns out that 'more enjoyable', especially when everyone is pursuing the same 'more enjoyable', comes at a cost.” So, in the end, many managers took on risks at least as high as equity for returns below the equity return rate, and received huge compensation, just to make us asset allocators feel secure in our work and ensure that others think we are at the forefront of investment. This is quite a hefty payment, as if the entire industry paid hundreds of billions of dollars from our collective investors to our collective managers over a decade, just to make life easier for us asset allocators! Many of those who made these allocation decisions are no longer around, so I guess this "whitewashing" has had some effect for some of them.

The final blow is that it turns out that private credit, which is set to become the new darling by 2025, is actually just as risky as public credit, which charges extremely high fees (and the SRTs favored by private credit prove that we learned nothing from CDOs). Just like private equity compared to public equity, private credit is at least as risky as its public counterparts—and after charging higher fees, it performs worse.

Cryptocurrency: Lessons from a Frenzied Mind

What is particularly infuriating is what has happened in the cryptocurrency space. We kept our distance until 2025. We thought it was foolish to believe that simply running computers for long periods could create something of value.

But when Bitcoin reached $100,000, we realized we had missed the next big event, and that running computers could indeed create digital gold (we learned that scarcity causes anything scarce to rise forever, even if it is utterly useless). Around this time, we spent a lot of time excitedly shouting "FEEYAT" at each other, like a drinking game, as if shouting louder and more frequently would make it more insightful.

To be clear, we also kept telling ourselves, and anyone willing to listen, that what we really liked was not cryptocurrency itself, but 'blockchain technology.' Strangely, the only way we expressed our love for this technology was again not through a genuine love for cryptocurrency itself, but through speculating on cryptocurrency.

Thus, at the end of 2024, we boldly increased our benchmark allocation by 5% when Bitcoin was priced at $100,000, and when it rose to $250,000 the following year due to rumors that the government was going to establish a "strategic Bitcoin reserve" and a tweet from Musk, we doubled down on our investment. 10% of the portfolio! Today, after the initial allocation 10 years ago and doubling down 9 years ago, Bitcoin is priced at about $10,000. There are still some die-hard fans. Frankly, the only thing that worked for us in this space was allocating 90% of the 10% cryptocurrency allocation to Bitcoin and 10% to the only cryptocurrency that will truly be worth something by 2035.

Of course, we gave up any gains from our clever 10% Fartcoin allocation by heavily buying a leveraged Bitcoin-related stock through many positive stock pickers. It turned out that buying essentially a Bitcoin closed-end fund at twice the already high price of Bitcoin was not the 'arbitrage' we were told it would be In addition, the results prove that Bitcoin has actually not yielded any returns, at least not in any sense of the word "returns" as used since the Roman Empire. We do not even feel regret about this. I mean, our active stock pickers listened to the words of this company's cryptocurrency prophet, who, as far as we know, has absolutely no history of massively buying and severely overselling bubbles, and there is no other reputable person telling us we shouldn't do so.

Active Management: Ignoring Traditional Value Investment Strategies

In terms of active management, our choices did not go as hoped. Active management often underperforms after deducting fees and trading costs, and the active managers we chose also failed to break this pattern. We failed to predict that traditional low-risk, low-valuation stock strategies would perform excellently between 2025 and 2034.

In terms of active management, our choices did not go as hoped for several reasons. First, the performance of active management (after deducting fees and trading costs) is always lower than that of passive indices. We fought against the Sharpe Ratio, and the result was that the ratio won. Second, we chose the wrong active fund managers; it turns out that while the entire active management industry theoretically always underperforms, this does not mean that certain subsets will not systematically derive excess returns from other subsets (the Sharpe Ratio does not apply to subsets). Between 2025 and 2034, traditional strategies of buying profitable, low-risk, reasonably priced, or undervalued companies were effective.

But sadly, by 2025, we had fired all these types of managers, even though the spread between "cheap" and "expensive" stocks remained high (peaking in early 2021), especially in the super expensive U.S. market. Although some of the most visionary and insightful people told us that the opportunities in this old-fashioned active management subset looked better than usual (if more frightening in the short term, as the market deviated further from fair value for longer), we still did so. After firing others, the remaining active managers bought unprofitable, highly volatile, equity-issuing, expensive stocks above our brand new all-American stock benchmark, which undoubtedly added insult to injury!

Alternative Investments: Abandoning Trend-Following Strategies Was a Mistake

We also abandoned trend-following strategies, which had only made a little money in the more than a decade since the Global Financial Crisis (GFC). We gave up the last allocation before we truly needed them in 2022. The result was that we never increased these strategies again. We should have done so. Trend-following typically performs quite well in long-term underperforming markets, especially in markets like the past decade, often helping you protect against recessions occurring within a decade, particularly in a long-term underperforming market.

In the past decade, they provided both functions again. Additionally, they often perform better when the market is volatile. Of course, we saw quite a few high-volatility periods during 2025-2034, as the market adjusted to more typical valuation levels, and the global financial situation slowly became more realistic. These adjustments are never easy! However, there is a silver lining. At least this time we did not change our minds based on 3-5 years of performance (we could have rejoined them a few years after they started to work effectively, but this time we resisted the impulse to chase) "You see, we can also have discipline."

Unfortunately, unlike the trend-following strategies we abandoned, another major risk mitigation strategy we adhered to has caused us harm. That is direct "tail hedging" through the purchase of options. While it protected us from a few very brief sharp declines, the ongoing loss of option premiums made it a loser over the decade. It didn't even protect us from several 1-2 year bear markets over the past decade, as the losses were too great, and the non-linear large returns of options did not always materialize, especially if the bear markets were stable and long-term rather than sharp and brief. We do not regret this, as who could have predicted that buying tail risk hedges would fail in a long-term underperforming market?

Oh, while I'm not sure which category to classify this under (liquid alternative investments?), we completely abandoned 'risk parity' investments by the end of 2024, primarily because it failed to outperform the U.S. 60/40 portfolio over the long term. Given that U.S. stocks underperformed global stocks, bonds had a higher risk-adjusted return than stocks, and commodities finally had a decent (if not outstanding) decade, it was an unfortunate decision.

Lastly, we certainly still have a small portion (gradually decreasing but still present) of traditional hedge fund allocations, mainly long-short equity funds. We initially thought they would provide real diversification during the most painful periods of the stock market. They did so to some extent. Unfortunately, no one told us that their beta was about 0.50 (instead of the 0.00 we assumed), with a correlation to the stock market of about 0.85 (instead of the 0.00 we assumed).

I should point out that one exception is some of the most well-known "multi-strategy" hedge funds, which began to truly dominate the market in 2025. They pay high salaries, charge high fees, and fire employees if performance is poor, even if favorable factor risks are hedged away, and all these measures work again. They have indeed maintained some very high risk-adjusted returns over the past decade, although the total returns are not huge, they are more useful for a foundation like ours than for taxable investors. The only issue is that these funds have limited capacity, and they do maintain discipline, so we can only make limited progress by holding them. But in an extremely challenging decade, we are willing to accept this small victory!

Looking to the future, we have learned our lessons and have adjusted our portfolio back to a global benchmark, increasing our allocation to non-U.S. markets. We will no longer invest in private equity, even if the current market seems cheap. At the same time, we will focus on value stock investments, although the current valuation gap for value stocks is below historical levels.

After this series of lessons, we firmly believe that despite the challenges of the past decade, we will embrace future investment opportunities with a more rational and prudent attitude. We hope that the period from 2035 to 2044 will be a brighter time