Few investment instincts have captured the retail imagination as completely as "Buy the Dip." The idea is elegant in its simplicity: prices fall, you buy, they recover, you profit. It worked spectacularly after the COVID-19 selloff in 2020. It failed spectacularly in 2022. Now, with Google search interest in the phrase spiking again following the brief "Liberation Day" volatility in April 2025, AQR's Portfolio Solutions Group has published a systematic examination of the strategy across 60 years of data. Their conclusion is unambiguous: Buy the Dip, as a tactical strategy, does not work.
The Test
AQR's team, led by Jeff Cao, Nathan Chong, and Dan Villalon, constructed 196 distinct Buy the Dip (BTD) implementations on the S&P 500, varying the depth of the dip (from 5% to 20%), the length of the drawdown period (one week to one year), and the subsequent holding period (one month to five years). The dataset runs from January 1965 to September 2025 — long enough to include multiple full market cycles, crises, and recoveries.
The first finding lands quickly. Across all 196 implementations, the average Sharpe ratio for BTD strategies was 0.04 below passive equity exposure — a 16% degradation in risk-adjusted return. More than 60% of all implementations underperformed the S&P 500 on this basis. Over the shorter period beginning in October 1989 (where total return data is available, including dividends), the degradation deepens considerably: the average Sharpe ratio shortfall versus passive rises to 0.27, a 47% deterioration.
Cao notes a seductive but misleading pattern in the data: "Strategies that look (relatively) good only after long holding periods may represent an investment 'siren song.'" Longer holding periods appear to rescue certain BTD implementations in chart form, but the improvement is statistically negligible in aggregate.
Alpha That Isn't
The authors then ask a tougher question: even if BTD underperforms on a standalone basis, does it add alpha to an existing equity allocation? The answer is effectively no. Across all 196 strategies, the average annualized alpha registers at just 0.5%. Only 16 of the 196 implementations, a mere 8%, clear the conventional threshold of statistical significance. And as Cao observes, "datamining is a bias that's particularly easy when testing nearly 200 strategies." Adjusting for the pairwise correlations across strategies, none of the implementations crosses the appropriately elevated significance bar of 3.52.
The Momentum Problem
The deeper explanation for BTD's underperformance lies in market structure. Trends in financial markets tend to persist over weeks and months. Value mean-reversion, by contrast, tends to operate over multi-year cycles. BTD, by construction, bets on reversal at the momentum horizon. As the authors put it, BTD investors "tend to bet on reversals when they should (in general) be betting on continuation. They are, in a sense, value investors at a momentum horizon."
The data confirms the structural tension. Across all 189 BTD implementations tested against the SG Trend Index — an equal-weighted benchmark of the 10 largest trend-following hedge funds — the average correlation is a consistent negative 0.14. BTD is, by disposition, anti-trend.
Trend Following Wins Where It Counts
Over the January 2000 to September 2025 period, the SG Trend Index produced a 4.7% annualized alpha to equities, compared to BTD's average of 0.3%. Trend outperformed on risk-adjusted terms by an average Sharpe ratio margin of 0.20. The gap widens decisively during severe equity market drawdowns: during the 2007 to 2009 financial crisis, the SG Trend Index gained 31.7% while the average BTD strategy lost 34%. During the 2000 to 2002 dot-com collapse, trend returned 51.4%; average BTD lost 14.7%. The one period where trend underperformed was the short, violent COVID drawdown of February to March 2020 — precisely the environment where BTD appeared to "work." The pattern is diagnostic: BTD is a strategy calibrated to the brief selloff, while trend-following is built for the prolonged decline that poses the real threat to investor outcomes.
Portfolio Construction Implications
For advisors integrating these findings into client portfolios, the paper models three trend-following overlays on a Global 60/40 portfolio, ranging from a pure alpha allocation (which improves the Sharpe ratio from 0.45 to 0.53 while reducing worst drawdown from 33.6% to 24.6%) to a portable alpha implementation that adds equity beta on top of trend alpha. Each implementation offers a different risk/return tradeoff, but all three outperform the BTD allocation on the metrics that matter most.
Five Key Takeaways for Advisors and Investors
- BTD is not a tactical strategy. Over six decades and 196 implementations, it fails to generate statistically meaningful alpha over passive equity exposure. Framing it as "smart buying" overstates its evidence base.
- The equity risk premium is the engine. Where BTD eventually produces returns, it does so because equities rise over time, not because the dip timing added value. Investors are better served by staying invested continuously.
- Momentum is the structural headwind. Markets trend over weeks and months. BTD bets against the trend at the worst possible horizon, functioning as what the authors call a "value investor at a momentum horizon."
- Trend following is the better timing alternative. It is not perfect, and it lags in sharp, brief selloffs, but it consistently outperforms both BTD and passive equity exposure during the extended drawdowns that most threaten investor outcomes.
- Portable alpha structures allow investors to pursue trend-following alpha without surrendering equity beta. For clients unwilling to reduce market exposure, this is the architecture worth examining.
Footnote:
1 Cao, Jeff, Nathan Chong, and Dan Villalon. "Hold the Dip." AQR Alternative Thinking, Issue 4, AQR Capital Management, LLC, 2025. AQR Portfolio Solutions Group.
