Insight Summit 2017: Intelligent Risk Taking Portfolio construction today - Cliff Asness, Managing & Founding Principal, AQR Capital Management Presented at the third annual Insight Summit conference held on 7 November 2017 by London Business School’s AQR Asset Management Institute.

1. FOR INSTITUTIONAL INVESTOR USE ONLY
Portfolio Construction Today
Cliff Asness, Ph.D.
November 2017
Managing and Founding Principal

2. Summary
Low expected returns on traditional assets is a major issue
Yet the key questions have not changed:
• What return sources do you believe in?
• How do you combine them in a portfolio?
Aggressive diversification across multiple return sources can help
• Across established market risk premia
• Across “newer” alternative risk factors
Regardless of how good your portfolio is, sticking with it can be tough
Source: AQR. Diversification does not eliminate the risk of experiencing investment losses. 2

3. * Earnings data through 6/30/2017.
Source: AQR, Robert Shiller’s Data Library (“U.S. Stock Markets 1987-Present and CAPE Ratio”), through June 30, 2017. The universe of stocks represented is the S&P 500. For illustrative purposes only. Please
read important disclosures in the Appendix. 3
Shiller P/E for U.S. Equities, January 1900 – September 2017*
0
5
10
15
20
25
30
35
40
45
50
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
Cyclically-AdjustedPriceEarningsRatio
30.7

4. * Earnings data through 6/30/2017.
Source: AQR, Bloomberg, Robert Shiller’s Data Library (“U.S. Stock Markets 1987-Present and CAPE Ratio”). Data description: The real equity yield is an average of the Shiller earnings yield (using 10-year
earnings) scaled by 1.075 (embedding an annual EPS growth of 1.5%) and dividend yield plus 1.5% (roughly the long-run real growth of dividends-per-share and earnings-per-share). The universe of stocks
represented is the S&P 500. The real bond yield is the yield on long-term U.S. Treasury bonds minus long-term expected inflation based on Blue Chip Economic Indicators, Consensus Economics and the Federal
Reserve Bank of Philadelphia. Before survey data became available in 1978, expected long-term inflation is based on statistical estimates and on 1-year ahead Livingston inflation forecasts. This is one set of
estimates of ex-ante real yields for equities and bonds, but other reasonable specifications should tell broadly the same story. Please read important disclosures in the Appendix. 4
U.S. Equity and Bond Real Yields, January 1900 – September 2017*
-5%
0%
5%
10%
15%
20%
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
U.S. Equity Real Yield U.S. 10Y Treasury Real Yield
0.1%
3.5%

5. * Earnings data through 6/30/2017.
Source: AQR, Bloomberg, Robert Shiller’s Data Library (“U.S. Stock Markets 1987-Present and CAPE Ratio”). Data description: The real equity yield is an average of the Shiller earnings yield (using 10-year
earnings) scaled by 1.075 (embedding an annual EPS growth of 1.5%) and dividend yield plus 1.5% (roughly the long-run real growth of dividends-per-share and earnings-per-share). The universe of stocks
represented is the S&P 500. The real bond yield is the yield on long-term U.S. Treasury bonds minus long-term expected inflation based on Blue Chip Economic Indicators, Consensus Economics and the Federal
Reserve Bank of Philadelphia. Before survey data became available in 1978, expected long-term inflation is based on statistical estimates and on 1-year ahead Livingston inflation forecasts. This is one set of
estimates of ex-ante real yields for equities and bonds, but other reasonable specifications should tell broadly the same story. Please read important disclosures in the Appendix. 5
U.S. Real Yield Spread, January 1900 – September 2017*
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
Real Yield Spread (Equities Minus Bonds) Average Real Yield Spread
3.3%

6. * Earnings data through 6/30/2017.
Source: AQR, Bloomberg, Robert Shiller’s Data Library (“U.S. Stock Markets 1987-Present and CAPE Ratio”), Ibbotson Associates (Morningstar), Kozicki-Tinsley (2006), Federal Reserve Bank of Philadelphia, Blue
Chip Economic Indicators, Consensus Economics. U.S. 60/40 is 60% U.S. stocks represented by the Standard&Poor’s 500 Index and 40% long-dated Treasuries represented by 10-year Treasuries. The equity yield
is a 50/50 mix of two measures: 50% Shiller E/P * 1.075 and 50% Dividend/Price + 1.5%. U.S. bond yield is 10-year real Treasury Yield over 10-year inflation forecast. Scalars are used to account for long term real
Earnings Per Share (EPS) Growth. Past performance is not a guarantee of future performance. Please read important disclosures in the Appendix. 6
Real Yield of U.S. 60/40, January 1900 – September 2017*
0%
2%
4%
6%
8%
10%
12%
14%
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
U.S. 60/40 Real Yield 5% Real Return
2.1%

7. Source: AQR. 7
What Is a Factor?
Market
Growth
(Expensive)
Value
(Cheap)Value
(Cheap)
Value
(Cheap)
Growth
(Expensive)
Stocks Same Stocks, Just
Sorted
Value Tilt Value Premium
Investing Style Factor
LongShort

8. Source: AQR. For illustrative purposes only. 8
Sources of Return
Alpha
Alternative Risk
Factors
Market Risk Premia

9. Source: Harvey, C., Y. Liu and H. Zhu. 2015.”…and the Cross-Section of Expected Returns.” Chart above represents the increase in the number of factors that papers are being written about and the number of
papers being written about factors. Includes only factors that published t-statistics or related statistics. Does not include factors that are researched but not published. 9
Choosing Your Animals from the “Factor Zoo”

10. Source: AQR 10
What of “The Zoo” Survives Our Criteria?
Momentum
Value
Carry
Defensive
Trend
Volatility

11. Source: AQR 11
Range of Implementation Choices
Long-only
Unlevered
Equity dominated
Single factor
Single geography
Single asset class
Long/short
Leveraged
Diversified
Multi-factor
Global
Multi-asset
Constrained Unconstrained

12. Value (B/P) Momentum
Profitability Low Beta
Measuring the Valuation of Factors in U.S. Large Cap Equities
Sources: AQR, CRSP, Compustat, XpressFeed Global. December 1967–May 2017. For illustrative purposes only and not representative of a portfolio that AQR currently manages. The spreads are a combination of
B/P and S/P spreads, and the universe is U.S. large cap stocks from CRSP/XpressFeed. The value factor is equivalent to that described in Fama and French (1992), except using up-to-date prices as described in
Asness and Frazzini (2013); Momentum is the UMD factor; Gross-Profits-to-Assets, or Profitability, is the GPOA (Gross profits Over Assets) factor as described in Novy-Marx (2012); Low-Beta is the Betting-Against-
Beta, or BAB, factor described in Frazzini and Pedersen (2014). Value, Momentum and Betting-Against-Beta factors are described in detail at the AQR Data Library, here: https://www.aqr.com/library/data-sets. For
more detail on methodology used in the chart above, see the Appendix and Asness (2016), here: https://www.aqr.com/cliffs-perspective/my-factor-philippic. Hypothetical data has inherent limitations, some of which
are disclosed in the Appendix. 12
Are the Main Factors Overcrowded and Overpriced?STDofValueSpread
(BasedonB/PandS/PSpreads)
-3
0
3
6
1968 1974 1980 1986 1992 1998 2004 2010 2016
-3
0
3
6
1968 1974 1980 1986 1992 1998 2004 2010 2016
-3
0
3
6
1968 1974 1980 1986 1992 1998 2004 2010 2016
-3
0
3
6
1968 1974 1980 1986 1992 1998 2004 2010 2016
0.11
(68th percentile)
0.06
(60th percentile)
0.30
(58th percentile) -1.26
(2nd percentile)

13. 13
Fairly Priced Strategies Do Not Ensure Against Short-term Panic

14. Be Realistic to Stick with a Plan Long-term
No Silver Bullets
High capacity, low Sharpe strategies are the long-term investor’s buddy
Unconventionality is more painful when it’s not working!
Doing more than you can stick with is near guaranteed failure
Good ideas aren’t “all or nothing”
14

15. Appendix

16. Disclosures
16
The views expressed reflect the current views as of the date hereof and neither the speaker nor AQR undertakes to advise you of any changes in the views expressed herein. It should not be assumed
that the speaker will make investment recommendations in the future that are consistent with the views expressed herein, or use any or all of the techniques or methods of analysis described herein in
managing client accounts.
The information contained herein is only as current as of the date indicated, and may be superseded by subsequent market events or for other reasons. Charts and graphs provided herein are for
illustrative purposes only. Nothing contained herein constitutes investment, legal, tax or other advice nor is it to be relied on in making an investment or other decision.
There can be no assurance that an investment strategy will be successful. Historic market trends are not reliable indicators of actual future market behavior or future performance of any particular
investment which may differ materially, and should not be relied upon as such.
The investment strategy and themes discussed herein may be unsuitable for investors depending on their specific investment objectives and financial situation. Please note that changes in the rate of
exchange of a currency may affect the value, price or income of an investment adversely.
Neither AQR nor the speaker assumes any duty to, nor undertakes to update forward looking statements. No representation or warranty, express or implied, is made or given by or on behalf of AQR, the
speaker or any other person as to the accuracy and completeness or fairness of the information contained in this presentation, and no responsibility or liability is accepted for any such information. By
accepting this presentation in its entirety, the recipient acknowledges its understanding and acceptance of the foregoing statement.
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Pension Opt Outs), arranging (bringing about) deals in investments, dealing in investments as agent, managing a UCITS, managing an unauthorized AIF and managing investments. This material has
been approved to satisfy UK FCA COBS 4.

17. Disclosures
17
This document has been provided to you solely for information purposes and does not constitute an offer or solicitation of an offer or any advice or recommendation to purchase any securities or other financial instruments and may not be construed as
such. The factual information set forth herein has been obtained or derived from sources believed to be reliable but it is not necessarily all-inclusive and is not guaranteed as to its accuracy and is not to be regarded as a representation or warranty,
express or implied, as to the information’s accuracy or completeness, nor should the attached information serve as the basis of any investment decision. This document is intended exclusively for the use of the person to whom it has been delivered
and it is not to be reproduced or redistributed to any other person.
PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE PERFORMANCE. There is no guarantee, express or implied, that long-term return and/or volatility targets will be achieved. Realized returns and/or volatility may come in higher or lower
than expected. Diversification does not eliminate the risk of experiencing investment losses.
Hypothetical performance results (e.g., quantitative backtests) have many inherent limitations, some of which, but not all, are described herein. No representation is being made that any fund or account will or is likely to achieve profits or losses similar
to those shown herein. In fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently realized by any particular trading program. One of the limitations of hypothetical performance results is
that they are generally prepared with the benefit of hindsight. In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk in actual trading. For example, the
ability to withstand losses or adhere to a particular trading program in spite of trading losses are material points which can adversely affect actual trading results. The hypothetical performance results contained herein represent the application of the
quantitative models as currently in effect on the date first written above and there can be no assurance that the models will remain the same in the future or that an application of the current models in the future will produce similar results because the
relevant market and economic conditions that prevailed during the hypothetical performance period will not necessarily recur. There are numerous other factors related to the markets in general or to the implementation of any specific trading program
which cannot be fully accounted for in the preparation of hypothetical performance results, all of which can adversely affect actual trading results. Discounting factors may be applied to reduce suspected anomalies. This backtest’s return, for this period,
may vary depending on the date it is run. Hypothetical performance results are presented for illustrative purposes only. In addition, our transaction cost assumptions utilized in backtests , where noted, are based on AQR's historical realized transaction
costs and market data. Certain of the assumptions have been made for modeling purposes and are unlikely to be realized. No representation or warranty is made as to the reasonableness of the assumptions made or that all assumptions used in
achieving the returns have been stated or fully considered. Changes in the assumptions may have a material impact on the hypothetical returns presented. Hypothetical performance is gross of advisory fees, net of transaction costs, and includes the
reinvestment of dividends. If the expenses were reflected, the performance shown would be lower. Where noted, the hypothetical net performance data presented reflects the deduction of a model advisory fee and does not account for administrative
expenses a fund or managed account may incur. Actual advisory fees for products offering this strategy may vary.
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adapted or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information, except where such damages or losses
cannot be limited or excluded by law in your jurisdiction. Past financial performance is no guarantee of future results.
There is a risk of substantial loss associated with trading commodities, futures, options, derivatives and other financial instruments. Before trading, investors should carefully consider their financial position and risk tolerance to determine if the proposed
trading style is appropriate. Investors should realize that when trading futures, commodities, options, derivatives and other financial instruments one could lose the full balance of their account. It is also possible to lose more than the initial deposit when
trading derivatives or using leverage. All funds committed to such a trading strategy should be purely risk capital.
Broad-based securities indices are unmanaged and are not subject to fees and expenses typically associated with managed accounts or investment funds. Investments cannot be made directly in an index.
The S&P 500 Index is the Standard & Poor’s composite index of 500 stocks, a widely recognized, unmanaged index of common stock prices.
The BofA Merrill Lynch U.S. T-Bill 0-3 Month Index tracks the performance of the U.S. dollar denominated U.S. Treasury Bills publicly issued in the U.S. domestic market with a remaining term to final maturity of less than 3 months.
This presentation may not be copied, reproduced, republished, posted, transmitted, disclosed, distributed or disseminated, in whole or in part, in any way without the prior written consent of AQR Capital Management (Asia) Limited (together with its
affiliates, “AQR”) or as required by applicable law. This presentation and the information contained herein are for educational and informational purposes only and do not constitute and should not be construed as an offering of advisory services or as
an invitation, inducement or offer to sell or solicitation of an offer to buy any securities, related financial instruments or financial products in any jurisdiction. Investments described herein will involve significant risk factors which will be set out in the
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exercise caution and if you are in any doubt about any of the contents of this presentation, you should obtain independent professional advice.
Construction of Valuation Spreads
The valuation factors follow the method of Fama and French (1993) except we use up-to-date price as studied by Asness and Frazzini (2013). The book-to-price (B/P) data comes from the AQR data library and sales-to-price (S/P) is calculated using
the same data sources (CRSP, Compustat, XpressFeed Global). Data for the momentum factor and Betting-against-beta (BAB) factor come from the AQR data library. Data for all factors is for large cap U.S. stocks and are capitalization weighted long
the 1/3 best stocks on the respective measure and short the 1/3 worst. Data are from January 1968 through January 2016. Additional information on sources and calculation methodologies are described on the website along with the data sets.