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Cliff Asness Knows Less than He Thought

AQR’s own research has disproven the size factor and undermined long-term forecasting.

  • By Leanna Orr

Cliff Asness and his co-founders built an asset management giant on their factor-investing expertise. 

Now AQR Capital Management’s own researchers have determined that the “patriarch of the family of anomalies or factors” — the size effect — does not exist. 

Asness reckoned with the information in a note published Wednesday on AQR’s website, titled after a Mark Twain quote, “It Ain’t What You Don’t Know That Gets You into Trouble.”

“There isn’t a pure size effect,” Asness wrote. “In fact, there never was a size effect.” 

[II Deep Dive: Asness in Purgatory]

The original study observing outperformance by stocks with small market capitalizations versus large ones — the size factor — was published in 1981. The findings helped earn its author Rolf Banz his PhD from the University of Chicago’s business school, an institution deeply ingrained in AQR’s intellectual lineage. Asness, among many other senior employees, is an alumnus. 

“Among other issues, the data used to discover it was flawed (though no fault of the author, that was the data back then) in a way that favored small stocks,” the AQR founder noted. 

More accurate modern data show no additional premium for small stocks. 

“It’s likely a sobering thought to many that the Ur‑anomaly, the one that’s been used to practically reorganize the entire money management industry, just isn’t there,” he continued. 

AQR, according to Asness’s note, has never been a major believer in the small-cap premia, and thus the research presumably won’t mean a full-scale revamp of its factor-based products and investment models. 

Likewise for the recent evidence that standard long-term return forecasting is less certain than had been assumed. Another paper by AQR staff determined that long-horizon return regressions have effectively small sample sizes, and researchers have vastly under-corrected for this phenomenon, arriving at findings that seem more certain than they are.  

“We know less than we thought,” Asness wrote. “The empirical best guess (the point estimate) remains the same. In fact, I think it is a very healthy thing if we (not just AQR, but the field) continue to question all the old results not accepting anything as canon.” 

A third longtime feature of Asness’s professional life has also recently changed. 

AQR’s head of North American business development Jeremy Getson relocated to Utah, he confirmed by phone. Getson is still with AQR, he said. But after 14 years with the firm, he will no longer be based out of AQR’s Greenwich, Connecticut offices. 

Getson helped popularize smart beta as a philosophy and product category, according to institutional allocators. 

“Jeremy did the road show on factor investing and alternative beta before most institutional investors really knew what they were,” Dominic Garcia, the chief investment officer for New Mexico’s pension fund, told Institutional Investor earlier this year. “AQR changed the way we invest, and I think Jeremy was the tip of the spear.”

Back then, the size factor was probably still a thing. 

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