Expected Returns: An Investor's Guide to Harvesting Market Rewards
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Summary
Ilmanen, who has worked at Salomon, Brevan Howard and AQR, produced a comprehensive survey of the empirical evidence on what generates returns across asset classes. The organising argument is that returns should be understood as compensation for risk factors and for behavioural and structural effects, and that these can be identified across asset classes rather than analysed separately within each.
The structure examines returns three ways: by asset class, covering equities, bonds, credit, commodities, currencies, real estate, private equity and hedge funds; by strategy style, covering value, carry, momentum, volatility and defensive; and by underlying risk factor, covering growth, inflation, liquidity and tail risk. He then examines how each behaves across environments and over time.
The empirical work is the book's substance. Ilmanen assembles long return series, decomposes historical returns into income, growth and repricing components, and argues that a large share of historical asset class returns came from valuation expansion that cannot recur. His forward-looking estimates, made in 2011, were systematically lower than historical averages, which was the correct direction though the subsequent decade delivered more than he expected.
The book is dense, technical and organised as a reference rather than a narrative. It is aimed at institutional allocators. Ilmanen's factor framing reflects his AQR affiliation, and readers should recognise that treating returns as factor compensation is a position rather than a settled finding. The historical data and the return decomposition method are useful independently of that framing.
Key takeaways 7
- Historical asset class returns should be decomposed into income, growth and valuation change, and the valuation change component cannot be expected to repeat.
- Starting yields and valuations are the best available predictors of long-horizon returns across every asset class.
- The same style factors, being value, carry, momentum and defensive, generate returns across asset classes rather than being specific to equities.
- Carry strategies earn returns as compensation for taking losses in bad states, which means the returns are payment for a risk rather than free.
- Illiquidity premia in private assets are substantially overstated because reported valuations are smoothed and do not reflect what a forced sale would realise.
- Diversifying across return sources rather than across asset classes produces better risk-adjusted outcomes, since asset classes share underlying factor exposures.
- Expected returns vary over time in ways that are partially predictable, which means constant long-run assumptions are the wrong input for allocation.
Who should read it
Institutional allocators and serious investors who need a comprehensive empirical reference on what drives returns across every asset class.
About Antti Ilmanen
Principal and Global Co-Head of the Portfolio Solutions Group, AQR Capital Management; previously Brevan Howard and Salomon Brothers/Citigroup
Expected Returns is the standard practitioner survey of risk premia across asset classes and styles, and it sits on top of three decades of institutional bond and multi-asset work.
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