Antti Ilmanen is a Principal at AQR Capital Management. Prior to joining AQR, Ilmanen spent seven years as a senior portfolio manager at Brevan Howard and a decade in a variety of roles at Salomon Brothers/Citigroup. He has published extensively in finance and investment journals and has received a Graham and Dodd award, the Harry M. Markowitz special distinction award, and multiple Bernstein Fabozzi/Jacobs Levy awards for his articles. Expected Returns is a broad [and dense] synthesis of the central issues in investing. It may be characterised as a one-stop reference providing investors with a comprehensive toolkit. An enormous breath of topics is covered in the book. Part I starts off with the historical record of market returns, followed by an overview on theories of return determination. Part II identifies 12 main sources of return across three groups including (i) risk premiums, (ii) factors and (iii) stylized strategies. In Part III, Ilmanen evaluates some predominant investment themes, including seasonal, cyclical and secular return patterns; new concepts such as endogenous risk and feedback loops; forming return expectations and forecasting models; and portfolio management issues such as diversification, leverage, time horizon, active vs passive, costs and others.



Broad Perspectives are crucial

Ilmanen’s main argument is that we need to evaluate any investment from multiple perspectives to gain a deeper understanding of the potential expected returns. These perspectives include its long-term historical performance, the evidence from financial and behavioral theories, and forward-looking valuation ratios. These perspectives are illustrated graphically in the book via a cube encompassing (i) asset classes, (ii) investing styles and (iii) risk-factors


Risk Premiums

  • The book offers generous insights into the strategies of active investment managers
  • Ilmanen is critical of the narrow focus on asset allocation
  • Returns should reflect the associated “risk premiums” of the underlying asset
  • Investors should concentrate more on ‘expected’ performance and ‘forward-looking’ tools
  • Too much emphasis is placed on the extrapolation of historical data

Key Takeaways

Ilmanen has a particular preference for time-varying risk premia and multiple systematic factors. Markets are dynamic and shift in complex patterns which are impossible to predict. The emphasis on capturing the fluidity of risk in such an environment is important.


  • Timing matters but should be approached with humility and caution
  • High-volatility assets tend to be overpriced and less-liquid assets offer higher returns
  • Investors overpay for the hope of growth
  • Value matters as “cheap” assets outperform
  • Higher-yielding assets do better than low-yielding assets
  • Momentum factors carry positive risk/reward as trends exist and persevere
  • Diversification works but often requires leverage to matter

I will leave the key message of the book to the author himself:

Its key message is that the most reliable way to seek consistent returns is to harvest many return sources – asset class premia from stocks and bonds, of course, but also several style premia such as value and carry.  Most investors consider their portfolios well-diversified, yet they tend to be largely driven by one source of risk: equity market direction.


Antti Ilmanen


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