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Friday, June 20, 2014

Asness Upstages Gross at Friday's M* Keynote

Reported by Anastasia Donde

Sorry Bill Gross, Cliff Asness is just cooler, and he can do it without the sunglasses.

At the keynote address on Friday morning at the Morningstar Investment Conference, the founder of AQR Capital Management, took out his glasses a few minutes into his speech to read from some materials he had prepared. “But these are just reading glasses, I need them because I’m old, they’re not sunglasses,” Asness said, making a direct dig at Gross’s feeble attempts to be a rockstar yesterday by wearing sunglasses on stage.

When everyone applauded, Asness, who’s runs the $105 billion investment business, said he now felt bad (for Gross?) that everyone was clapping. (Take note wannabe rockstars: some humility is often a good trait of an actual rockstar.)

What else did Asness have to say? The popular, and often funny, quant manager who had launched the quant group at Goldman Sachs Asset Management and later moved on to start AQR, re-hashed some of the points he made in a recent Institutional Investor article talking about the Nobel prize that was split between a proponent and a critic of the Efficient Market Hypothesis, Eugene Fama and Robert Schiller, respectively.

Asness admitted that he’s been a disciple of Fama’s in the past, wrote his dissertation for him on the price momentum strategy and has been a teaching assistant of Fama’s, which makes him a little biased. Though he also noted that, given the way AQR has positioned its strategies over the years, he’s probably well biased in both directions. (Though wouldn’t that mean, he’s unbiased after all?)

He said Fama’s famous and most basic quote is: “I take the market efficiency hypothesis to be the simple statement that security prices fully reflect all the available information.”

“The very bad news is that you can’t actually test this hypothesis,” Asness said.

He later went on to joke that “when you’re a statistician, you have other dreams. You don’t dream about nice houses, or cars, or significant others, you dream about sample tests.” Though the two kinds of fantasizes aren’t necessarily unrelated, Asness noted. “Having good sample tests for a statistician will lead to the nice houses, cars and significant others.”

All in all, Asness said he’s more middle of the road when it comes to the efficient market hypothesis and could take some from column a and column b, and he went on to outline how this has applied to his experience at Goldman and at AQR. Asness is well known for being one of the first quite successful managers to turn his hedge funds into mutual fund products and grow the latter without sacrificing the former (something many hedge fund managers worry about when starting liquid alts products). Though he noted that when he was at Goldman, hedge funds were a small part of what he did. “Everyone likes to refer to us [at AQR] as a hedge fund, because when times are good, it looks trendy and when times are bad, it looks evil.” But he thinks of AQR as a general quant-based investment firm, where he runs institutional separate accounts, as well as hedge funds and mutual funds.

He said that even if you were to suppose that markets are efficient, they’ll still fall pray to behavioral factors that you can’t predict at times. “Behavioral facts are real and people aren’t perfect. That can’t be arbitraged away,” he said. “I’m cynical,” he said, “but I’m not as cynical as Gene [Fama] and that’s my gold standard for cynicism.”

On the feud between active and passive management, Asness also seemed to suggest he sees merits in both. “There are so many terms for it now: active management, smart beta. Do we try to beat benchmarks? Yes, so I guess we’re active managers.”

He noted that in the 70’s, “the idea of index funds was called un-American, because it meant settling for mediocrity.” Now the pendulum seems to have swung in the other direction.

“When my relatives ask me for investment advice, I say, ‘have you met Jack Bogle?’” Asness said, adding that “he’s a very smart man and it’s better to believe in Jack Bogle than to believe in eight stocks.”  

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