Cliff Asness has built AQR Capital Management into a systematic investing giant by capitalizing on two trends: the growing power of computers and the demand for lower fund fees. Today, AQR runs $226 billion in strategies built on so-called factors—behaviors that securities tend to exhibit over time. The problem is the “over time” qualifier – AQR is having a miserable 2018. So how is Asness dealing with it?
Firstly, he seems to have identified why he’s doing badly: “The big culprit on the year is systematic value investing. That one has been bad for quite a long time, probably since just after the financial crisis. And, to answer a question you didn’t ask, our faith in that doesn’t change a drop either. So in a given year, value might have a tough time, but if quality, momentum, and carry all do well, we can do well. This year, the other ones are not making up for value.”
Next, he claims to have checked that the factors that have worked well for him in the past have not broken down (i.e. got arbitraged away): “It’s something we actively monitor. The main tool that many people use these days to monitor the state of where we are and whether these are being arbitraged away is something called the value spread. Any factor can be thought of as a long/short portfolio. And on various value metrics—any of your favorites, price-to-earnings, sales-to-book—how expensive are the longs vs. the shorts? For the value factor itself, the longs always look cheap by definition. But for the other factors, it varies, and all of them have a range through history. None of that is at levels where the factors have not done well going forward.”
Finally, he does NOT think the end of QE fundamentally changes the game for quant funds (who, some believe, are glorified trend following machines): “It is reasonable, it’s just absolutely not borne out by the data. A lot of these tests go back longer than the bull market in bonds. Look at the core, old-fashioned but still wonderful value and momentum factors for picking U.S. stocks. The data in that starts in the ’20s, and the initial tests on it were done in the mid-’80s. There was no bond bull market to drive that. The last 30 years have been a pretty massive, on net, bond bull market. But there have been some pretty horrible bear ones, and we don’t see a tremendous pattern there either.”
Interestingly, Asness happily admits in the interview that Renaissance Technologies’ remarkable Medallion fund is the best quant fund in the world. He also lauds Arrowstreet Capital in Boston and Rob Arnott’s Research Affiliates.
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