CFA Conference: Clifford S. Asness

21st Century Asset Management

Moderated by Brendan Conway, Barron’s

Clifford S. Asness (@Cimmerian999) is co-founder, managing principal, and chief investment officer at AQR Capital Management. Prior to co-founding AQR Capital Management, he was a managing director and director of quantitative research for the asset management division of Goldman, Sachs & Co. Mr. Asness serves on the editorial board of the Journal of Portfolio Management, the governing board of the Courant Institute of Mathematical Finance at NYU, the board of directors of Q-Group, and the board of the International Rescue Committee. He received a BS in economics from the Wharton School, a BS in engineering from the Moore School of Electrical Engineering at the University of Pennsylvania, and an MBA and a PhD in finance from the University of Chicago.

• Trends that are likely to transform the investment industry
• Steps that firms need to take to be relevant in the future, and constraints we will never be able to do anything about
• Skills that investment professionals, firms, and clients will need to thrive in the next 20 years:
  • Developing a better understanding of risk
  • Making judgments and a constant philosophy equal to data
  • Offering hedge funds that hedge
  • Recalibrating fees 

My session notes follow. As always, these are contemporaneous notes. I make no guaranty as to their accuracy or completeness.

• Markets are not totally efficient, but more efficient than most practitioners think
• What does EMH say? “I take the market efficiency hypothesis to be the simple statement that security prices fully reflect all available information” (Fama 1991); that doesn’t mean that returns are normally distributed, that stocks are a good thing, that free markets are necessarily good, that CAPM is the right model, or that prices are always “right” (even if they reflect all available info)
• EMH can’t be tested directly (can only be tested within a model of market efficiency); the “joint hypothesis problem”
• Challenges to market efficiency: Micro (e.g., value v. growth); macro (Why, at various times, does the S&P 500 look so rich?)
• Is value (or momentum) compensation for irrational behavior or risk? Behavioral and EMH explanations are both possible
• Does herding influence whole markets? Shiller (1981) says “yes”; EMH says that herding analysis ignores variations in the discount rate
• Real world lessons: HML (long/short cheap/expensive) cumulative returns – performs well with low correlation; but got crushed during the tech bubble (when he started AQR); momentum helped but not nearly enough
• It wasn’t just a “micro” phenomenon – note PE10 leading to 1999; for those levels to be rational, absolutely nutty assumptions about future dividends (e.g., CISCO owns the world)
• Inefficiency in the real world – even Fama admits that extreme form of EMH is false, but still hard to beat the market; “fixing” bad prices is risky; the limits of arbitrage
• Efficiency in the real world – it’s really hard to beat the market; Shiller was very early with “irrational exuberance”; very few “geniuses”
• A more reasonable starting point – factors not consistent with EMH and reasonable models thereof
• Clearly, markets are not perfectly efficient, but one should start by assuming EMH is correct; again, it’s really hard to beat the markets
• Implications? Individual investors should usually act as if EMH is true (low cost, passive and re-balanced portfolio); “tilting” still makes sense; bubbles exist but are rare; dangerous to think that governments can protect us from bubbles too (perhaps too early, wrong, etc.)
• Less than efficient markets need to be better (even though markets the best allocator of capital long-term) – don’t eliminate the downside; encourage short-selling and liquidity provision; mark everything to market and punish fraud harshly; foster institutional and regulatory consistency
• EMH a big deal and generally a very good thing
• Q&A…
• Hedge fund underperformance – “trade” has gotten crowded; but less dramatic than it seems, because HF remain net long; HF need to be benchmarked differently (as lower risk vehicles)
• He has continued to refine what he means by “value”; GAAP earnings don’t eliminate its benefits
• He disagrees with Michael Lewis re HFT
• Picketty? First third is great, but central assumption (r > g) is false (it would be about 5% real); but prospective future returns are going down (more like 2.5% real now); he’s too aggressive for capital; not as rosy for owners of capital as he assumes; would prefer growth becoming a much bigger number
• Very tough to time anything; he simply bets on the factors he believes in and lets the chips fall
• If you bet on both value and momentum, they often cancel each other out; but the “value” of value is stronger

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