Talks at GS• Sep 6, 2022• 43:14Interview

Cliff Asness, Founder, Managing Principal, and Chief Investment Officer of AQR Capital Management

From Talks at GS

Cliff Asness•Founder, Managing Principal, and Chief Investment Officer of AQR Capital Management

Executive Summary

Cliff Asness of AQR Capital Management discusses his firm's quantitative 'applied academia' approach, which focuses on systematic factors like value, momentum, and quality.
He argues that the traditional 'two and 20' hedge fund fee model is unsustainable for well-known systematic strategies and that AQR has helped drive fee compression in the industry.
After a painful period of underperformance for value investing (2018-2020) that led to significant AUM decline, Asness is now bullish on the factor, predicting several years of above-normal returns as valuation spreads normalize.
Asness advises professionals to avoid chasing 'hot' career trends, arguing that by the time a field is popular, the primary opportunity has often passed.

12 quotes

Concerns Raised

High overall equity valuations persist despite the recent market downturn.
Investors' tendency to chase performance and abandon strategies at the point of maximum pain.
The speculative nature and 'huckster' element surrounding cryptocurrency.
The challenge of retaining clients through the inevitable, painful drawdowns of systematic strategies.

Opportunities Identified

The value factor is poised for a multi-year period of above-normal returns due to historically wide valuation spreads.
Systematic, factor-based strategies offer a durable source of long-term returns for disciplined investors.
Trend-following strategies can provide valuable portfolio diversification, particularly during market dislocations.

Key Themes

Quantitative Investing Philosophy

AQR's investment approach is described as 'applied academia,' systematically implementing well-researched factors like value, momentum, quality, and low beta. This quant approach is contrasted with traditional management, noting that while the goals are similar (finding good companies at reasonable prices), the method relies on breadth and statistical phenomena rather than deep, single-company analysis.

This demystifies quantitative investing by grounding it in understandable, fundamental concepts and explains how it can be applied in both long-only and long-short formats.

The Psychology of Factor Investing

Asness emphasizes the extreme difficulty of sticking with strategies during prolonged drawdowns, citing the recent underperformance of value investing. He notes that many clients capitulated at the worst possible time, and argues this behavioral pain is precisely why factor premiums persist over the long term; if it were easy, the opportunities would be arbitraged away.

This highlights the critical role of behavioral discipline in successful long-term investing, underscoring that even proven strategies test investor patience to its limits.

Fee Compression in Asset Management

Asness explains AQR's decision to differentiate its pricing, arguing that systematic exposure to well-known factors should not command traditional 'two and 20' hedge fund fees. He believes this move was both ethical and 'long-term greedy,' as it aligns fees with the nature of the strategy and builds a more sustainable business model in a competitive market.

This provides an insider's perspective on the structural shifts in the asset management industry, where transparency and competition are driving fees down for more commoditized strategies.

Market Outlook and Value Factor Recovery

Despite a recent market downturn, Asness believes equity valuations remain high by historical standards. However, he is optimistic about the value factor specifically, noting that valuation spreads between cheap and expensive stocks remain wide, which has historically preceded periods of strong outperformance. He predicts the value factor will likely generate above-normal returns for the next two to three years.

This offers a specific, forward-looking market call from a leading quantitative investor, suggesting a potential tactical opportunity for investors to re-evaluate their exposure to the value factor.

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Topics

Quantitative Investing Factor Investing Value Investing Momentum Investing AQR Capital Management Cliff Asness Hedge Funds Asset Management Fee Compression Two and Twenty Market Cycles Behavioral Finance Investor Psychology Career Advice Cryptocurrency Valuation Spreads Warren Buffett

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