AQR’s Cliff Asness Told You Bad Times Were Coming

“Mostly it’s a tale of woe for our equity strategies,” he writes, asking clients to persevere through AQR’s rough patch.

Illustration by II; Patrick T. Fallon/Bloomberg

Illustration by II; Patrick T. Fallon/Bloomberg

A few years before AQR Capital Management’s current rough patch, founder Cliff Asness regularly shared with clients a presentation predicting factor investing would one day be hated, despite how good it was at the time.

Just because that forecast is “obvious” doesn’t mean it’s “really believed and internalized,” Asness wrote in a new blog. The post’s title, “Quant Cassandra,” references a woman in Greek mythology who was doomed to know the future without the power to convince anyone of it.

When things got rough for AQR about sixteen months ago, the quantitative investment firm was closing strategies due to excess demand, according to Asness. The change in fortunes over the past year and a half has been hard to bear — tougher than it should be in “a world of cold scientific automatons,” he wrote.

Except for niche areas like defensive equity and global macro, “mostly it’s a tale of woe for our equity strategies,” Asness said. He urged clients to stick with the strategies through the pain, believing them to be worthy, long-term investments for many portfolios through unforecastable bad times.

The AQR co-founder considered the success of legendary investor Warren Buffett, pointing to a 2013 paper by his colleagues showing quant themes such as “value,” “profitability,” and “low risk” clearly emerge in his returns. He also looked at Buffett’s ability to endure volatility. “Basically, you can say my colleagues’ paper shows it’s pretty easy to become one of the very richest people in the world,” said Asness. “Just pick a few good factors.”

Beyond that, Buffett, the chief executive officer of Berkshire Hathaway, has pulled off something that is arguably more difficult for investors, according to the blog.

“One of the secrets of Buffett’s success is that he takes a lot of volatility,” Asness wrote. “In fact, he runs a portfolio with volatility generally well north of the S&P 500.” Buffett produces this by leveraging a portfolio that on its own would be less risky than the S&P, according to the blog. “The real magic skill of his is that despite some fairly horrific and none-too-short relative and absolute return periods, he’s stuck with his style, and his risk level, like grim death,” said Asness.

[II Deep Dive: Cliff Asness: Stick With Liquid Alts]

AQR is similarly asking clients to persevere.

“In investing, perhaps more so than many other fields, you truly have to learn to ‘…meet with Triumph and Disaster And treat those two impostors just the same,’” wrote Asness, linking to Rudyard Kipling’s poem “If–”.

“We didn’t think we were so great sixteen months ago,” Asness said in his blog. “And I don’t think we stink now.”