The authors’ goal is to provide a useful perspective with which to evaluate investment sensitivities to macroeconomic risks and to help in building a more robust portfolio that is able to withstand those risks. They evaluate the Sharpe ratios of different portfolios in various macroeconomic environments over the past 40 years. Then they present the sensitivities of various investments in certain environments and illustrate the merits of asset class and style diversification.

To assist practicing investors, the authors contribute research that is applicable in constructing diversified portfolios that are better able to withstand different macroeconomic environments. Although they concede that predicting those environments will remain a challenge, they present a framework for reassessing portfolio risk by adding awareness of a portfolio’s exposure to macroeconomic risks (which are not directly investable) to the risks identified via investable asset class exposure. Their evaluation of empirical performance data (Sharpe ratios) for three traditional long-only assets, five alternative long–short styles, and a few combinations thereof in response to five macro risks over 40 years is robust.

The authors present the sensitivities of these investments in certain environments in a way that allows investors to evaluate how their own allocations might respond to, for example, a low-growth, high-inflation environment and how diversification can reduce those sensitivities with balanced and opposite reactions.

They find that the long–short styles (or strategies) are, in general, less sensitive than each of the asset classes to macro shocks. Unsurprisingly, they also find a diversified portfolio with more than one asset or style to be more resistant than a single representative of each. To assess the effectiveness of further diversification in reducing macro risk exposure, the authors also construct and review the sensitivities of three simple portfolios (60/40 global equity/bond, naive global risk, and equally weighted composite of each long–short style). The 60/40 global portfolio exhibits the highest sensitivity to adverse macro environments, whereas the composite long–short styles provide the greatest diversification benefits with stable Sharpe ratios in most conditions. Given that the five alternative long–short styles exhibit more consistent performance in different macroeconomic environments, the authors argue that they deserve a place in institutional portfolios seeking risk diversification.

The authors use annual US macroeconomic data from the past 40 years (1972–2013) and contemporary asset and style returns over the same periods. The five macroeconomic risks are each composites of two series normalized by subtracting a historical mean and presented as a binary output (i.e., up or down). These are growth (Chicago Fed national activity and surprise US industrial production), inflation (year-over-year inflation and surprise US Consumer Price Index), real yields (10-year and short-term rates minus forecasted estimates), volatility (based on S&P 500 Index and 10-year Treasury returns), and illiquidity (Treasury–Eurodollar spread and an illiquidity measure for stocks).

Their results are admittedly dependent on their design choices and representative investment portfolios, for which they include three traditional asset classes (global stocks, global bonds, and commodities) as well as five long–short styles (value, momentum, carry, defensive, and trend). Their findings are presented as a graphical representation of the Sharpe ratio for each asset and style in various macro environments. The authors emphasize that they did not deduct trading fees or costs, which is especially important to note because it would likely have a sizable effect on performance for the style data.

The authors do a fair job of casting a wide net to draw generalizations from an analysis of only a subset of possible combinations of variables while also reminding the reader of the limitations of their research.