WEBVTT - Masters in Business: AQR Scott Cliff Asness (Audio) 0:00:03.240 --> 0:00:07.560 This is Masters in Business with Barry Riddholts on Bloomberg Radio. 0:00:08.119 --> 0:00:11.360 Welcome to Masters in Business. I'm Barry Ridholts. You're listening 0:00:11.360 --> 0:00:16.439 to Bloomberg Radio and today's guest is someone uh you 0:00:16.480 --> 0:00:19.279 will find absolutely fascinating. First, let me give you a 0:00:19.280 --> 0:00:22.919 brief intro. How do I begin to describe Cliff ass Ness. 0:00:23.120 --> 0:00:26.119 He is the founder of a q R, which is 0:00:26.160 --> 0:00:29.680 a hundred and twenty billion dollar asset management firm slash 0:00:29.720 --> 0:00:34.599 hedge fund. A q R stands for Applied Quantitative Research. 0:00:35.440 --> 0:00:41.680 Fascinating gentleman, really really interesting background. Undergraduate University of Pennsylvania, 0:00:41.840 --> 0:00:47.200 Wharton Economics, you pen engineering degree a double engineer, double major. 0:00:47.600 --> 0:00:49.960 Goes to University of Chicago, ends up with an m 0:00:50.040 --> 0:00:55.600 b a slash PhD in the Chicago program. Um eventually 0:00:55.720 --> 0:00:58.560 takes a time off to go to Goldman Sachs, where, 0:00:58.560 --> 0:01:00.920 at age twenty nine, he's the head of the quant group. 0:01:01.280 --> 0:01:06.000 Just an absurd, absurd resume. Pull up the papers that 0:01:06.040 --> 0:01:11.280 he's written, dozens of award winning best and Best in Show, 0:01:11.680 --> 0:01:16.120 Best of the Year. Just really a phenomenally interesting and 0:01:16.200 --> 0:01:19.640 insightful guy. A little background as to how we met 0:01:20.080 --> 0:01:22.640 and how he ended up doing the show because um, 0:01:22.680 --> 0:01:25.640 as he generally said during the interview, I stalked him 0:01:25.640 --> 0:01:30.600 for a while. So Cliff rights very frequently, which is 0:01:30.640 --> 0:01:32.639 something that we do in our shop. And I really 0:01:32.840 --> 0:01:35.880 like people who take all their thoughts and put them 0:01:35.920 --> 0:01:39.880 down in an organized, structured fashion, and they have something 0:01:40.040 --> 0:01:43.080 interesting to say, and lots of lots of things that 0:01:43.160 --> 0:01:47.600 he writes are just fascinating and insightful and just a 0:01:47.680 --> 0:01:50.360 touch of humor, a dollarp of humor thrown in. You 0:01:50.400 --> 0:01:52.440 look at some of the headlines of his white papers 0:01:52.520 --> 0:01:56.000 or his blog post and you'll see some really clever 0:01:56.680 --> 0:02:01.520 amusing titles that with lots and lots of pop cultural references. 0:02:01.960 --> 0:02:04.560 In addition, there ain't a whole lot of hedge fund 0:02:04.560 --> 0:02:07.440 managers running the sort of money he is that tweet 0:02:07.480 --> 0:02:10.960 on a regular basis, and so he published. He was 0:02:11.000 --> 0:02:13.040 one of the signatories to the letter to Ben Ben 0:02:13.080 --> 0:02:16.919 Bernanke worried about hyper inflation and the collapse of the dollar, 0:02:17.480 --> 0:02:19.760 and I called him in a number of people out 0:02:19.840 --> 0:02:23.040 on it. And while many of the people who who 0:02:23.080 --> 0:02:25.880 were on the wrong side of the hyper inflation debate 0:02:26.440 --> 0:02:29.840 kind of pretended they never said it, Cliff came right 0:02:29.880 --> 0:02:33.280 back at me on Twitter. Well, you know there's still time, 0:02:33.360 --> 0:02:35.840 but so far it looks like I'm wrong and you're right. Hey, 0:02:35.880 --> 0:02:38.560 you don't get that sort of response from people. Usually 0:02:38.600 --> 0:02:40.560 you get a lot of arrogance and pushed back and 0:02:40.600 --> 0:02:42.760 we'll see, you know, it's only been five years, give 0:02:42.800 --> 0:02:45.839 it another decade. But he's not that way. He's like, well, 0:02:45.880 --> 0:02:48.440 so far, I've clearly been wrong. And you know, he's 0:02:48.440 --> 0:02:53.559 a real data guy and I respect that tremendously. Um, 0:02:53.600 --> 0:02:58.480 you'll find he's not your typical billionaire hedge fund manager. Uh. 0:02:58.520 --> 0:03:01.880 Extremely Even though he doesn't do a lot of media, 0:03:01.960 --> 0:03:03.800 and even though I stalked him for a good year 0:03:03.880 --> 0:03:07.119 to get him on the show, he was really stunning 0:03:07.240 --> 0:03:11.359 Lee charming and self effacing and witty and not at 0:03:11.400 --> 0:03:14.920 all what you would imagine a lot of people in 0:03:15.040 --> 0:03:17.920 his position are like. And if you read some of 0:03:17.960 --> 0:03:22.960 his writings, they're very very you know, here's the data, 0:03:23.160 --> 0:03:26.400 here's the context, here's here's what the details are, and 0:03:26.400 --> 0:03:28.600 that's pretty much it. They're very aggressive, they're a little 0:03:28.600 --> 0:03:31.400 in your face, but he's got the goods to back it. 0:03:31.440 --> 0:03:34.360 If he's in your face, it's because the numbers are there, 0:03:34.720 --> 0:03:38.520 and he's at heart a numbers guy. So we stopped 0:03:38.600 --> 0:03:41.760 just around the two hour mark. I'm not kidding when 0:03:41.800 --> 0:03:44.280 I say this could have gone another two hours. We 0:03:44.400 --> 0:03:47.560 absolutely would not have run out of questions. I find 0:03:47.600 --> 0:03:50.600 him to be one of the most fascinating people in finance. 0:03:51.080 --> 0:03:55.400 Lots of what he writes is really really influential. It 0:03:55.560 --> 0:03:59.360 moves the debate forward, it moves the argument of finance forward. 0:03:59.560 --> 0:04:02.040 And um, I think this is one of the most 0:04:02.040 --> 0:04:06.040 interesting conversations we've had on the show. So without me 0:04:06.160 --> 0:04:08.840 babbling a whole lot further, I think you're really gonna 0:04:08.920 --> 0:04:17.080 enjoy our conversation with a qu Rs Cliff Astenus. This 0:04:17.320 --> 0:04:21.240 is Masters in Business with Barry Ridholts on Bloomberg Radio. 0:04:21.520 --> 0:04:24.480 My special guest today is someone who I've been chasing 0:04:24.839 --> 0:04:27.040 for a while to have on the show. I'm gonna 0:04:27.120 --> 0:04:30.760 introduce him first and then give you his curriculum vitae, 0:04:30.920 --> 0:04:32.760 and that will be the first half hour of the show. 0:04:32.960 --> 0:04:35.680 Cliff Fastness, welcome to the program. Thank you, Barry. I'm 0:04:35.720 --> 0:04:38.239 excited to be here. Um, I'm I'm actually really excited 0:04:38.279 --> 0:04:40.040 to have you. Let me. For those of you who 0:04:40.040 --> 0:04:42.800 are not in the financial industry and may not be 0:04:42.920 --> 0:04:46.280 familiar with Cliff assness name. We have a little bit 0:04:46.320 --> 0:04:50.560 of of financial royalty here. First, you're the founder and 0:04:50.680 --> 0:04:53.880 chief investment officer of a q u R, which runs 0:04:53.920 --> 0:04:57.120 about a hundred and twenty billion dollars in both hedge 0:04:57.120 --> 0:05:01.320 funds and traditional strategies. Have a few co founders, David 0:05:01.360 --> 0:05:03.680 Cambrella and John lou Those are the guys that you 0:05:03.760 --> 0:05:06.840 were working with at Goldman Sachs. Correct, When before we 0:05:06.880 --> 0:05:10.640 get to Goldman Sachs, you graduated you penn with a 0:05:10.680 --> 0:05:14.760 degree in economics from Wharton and a simultaneous degree Bachelors 0:05:14.760 --> 0:05:18.080 of Science and Engineering. Yes, either one of those is 0:05:18.120 --> 0:05:20.880 a heck of a degree. To have a lot of 0:05:20.960 --> 0:05:22.880 a lot of effort, a lot of work, both of 0:05:22.920 --> 0:05:26.039 them at once. That's really an impressive. I didn't know 0:05:26.080 --> 0:05:28.680 any better and had no social life there you go. 0:05:29.080 --> 0:05:34.160 So you go from Wharton to Chicago at the Booth School. 0:05:34.400 --> 0:05:36.719 But may not it was, It wasn't, but it was 0:05:36.720 --> 0:05:39.119 just Chicago. I'm giving David as due was the Booths 0:05:39.120 --> 0:05:41.960 School just wasn't called it yet. And you the research 0:05:41.960 --> 0:05:45.680 assistant to Eugene Fama, known as the father of the 0:05:45.680 --> 0:05:48.840 efficient market hypothesis. We'll get to that a little later. 0:05:48.839 --> 0:05:51.159 Because you're not exactly an E. M. H type of guy, 0:05:51.440 --> 0:05:54.560 and um, he chaired your doctoral dissertation. You got your 0:05:54.600 --> 0:05:57.880 PhD um which is not in any specific atis a PhD. 0:05:57.920 --> 0:06:00.280 And no people always ask me this. It's you get 0:06:00.279 --> 0:06:03.720 it from the business school. You effectively major in whatever 0:06:03.760 --> 0:06:06.279 you wrote your dissertation in, but it's a generic business 0:06:06.279 --> 0:06:09.520 school PhD. And so you decide to write your dissertation 0:06:09.839 --> 0:06:12.800 on how you could use momentum and value to beat 0:06:12.839 --> 0:06:15.560 the market when your doctoral thesis advisor is the guy 0:06:15.560 --> 0:06:19.800 who says, no, you can't. Yes, that was with some trepidation. 0:06:19.920 --> 0:06:22.000 He and his co author was also one of my advisors. 0:06:22.040 --> 0:06:24.280 Ken French had already done a lot of work on value. 0:06:24.480 --> 0:06:28.799 French from again More Financial Royalty. To say the least, 0:06:29.560 --> 0:06:32.159 they had already done a lot of the pioneering work 0:06:32.200 --> 0:06:36.040 on value investing and value investing. It's still a fight. 0:06:36.080 --> 0:06:39.160 It's still arguable whether it works because markets are irrational 0:06:39.279 --> 0:06:41.520 or whether it works because it's a risk premium of 0:06:41.560 --> 0:06:43.279 some kind. And we could spend a whole show talking 0:06:43.279 --> 0:06:46.400 about that momentum. I guess some people argue about it 0:06:46.440 --> 0:06:48.680 but I think the literature is far stronger on the 0:06:48.680 --> 0:06:51.159 irrational side. So yeah, it was scary to tell you. 0:06:51.279 --> 0:06:53.159 I tell I've told the story for years, going up 0:06:53.200 --> 0:06:55.400 to Gane and saying I want to write a dissertation 0:06:55.480 --> 0:06:58.240 on on price momentum, the simplest of all momentum to 0:06:59.360 --> 0:07:02.120 dr Farm and and then I mumbled the second part. 0:07:02.440 --> 0:07:06.240 And it works really well because a dissertation saying momentum 0:07:06.320 --> 0:07:08.840 is terrible is a perfect Fama dissertation. You know, look 0:07:08.839 --> 0:07:11.240 at these fools following this to his credit, and this 0:07:11.320 --> 0:07:13.520 is actually I think a warm story. Um, he has 0:07:13.520 --> 0:07:16.400 his opinions, and he but he is brilliant and he's 0:07:16.400 --> 0:07:19.680 open minded. Um, you don't change his mind. But he 0:07:19.840 --> 0:07:22.280 is very comfortable. He said, if it's in the data, 0:07:22.360 --> 0:07:25.880 write the paper. Wow, that's really interesting. So the weather 0:07:25.920 --> 0:07:29.160 in Pennsylvania is bad enough, what made you say I 0:07:29.200 --> 0:07:31.160 want to go to Chicago? It gets worse? So I 0:07:31.200 --> 0:07:34.680 had to choose between Chicago and Stanford. They had precisely 0:07:34.760 --> 0:07:38.000 the same scholarship program for Peach. Peach season has got 0:07:38.040 --> 0:07:40.800 a good deal, we don't actually pay. It was exactly 0:07:41.240 --> 0:07:44.760 the same, and UM, Chicago at that point probably still 0:07:44.920 --> 0:07:47.200 UM was just an incredible program. I got advice from 0:07:47.240 --> 0:07:49.720 so many people saying, if you if you're serious about finance, 0:07:49.720 --> 0:07:51.680 and you can go to Chicago, go But it was 0:07:51.680 --> 0:07:53.880 pretty hard enough to go to Stanford. I can imagine. 0:07:53.920 --> 0:07:56.680 Did you know you would be working with Fama beforehand? No, 0:07:57.240 --> 0:07:59.280 he kind of chooses you, and I got lucky and 0:07:59.280 --> 0:08:02.000 he chose me. Um. He was one of the reasons 0:08:02.080 --> 0:08:03.840 I'd certainly heard of him, but less so than you 0:08:03.840 --> 0:08:06.440 can imagine. I was a little naive. Um. I just 0:08:06.520 --> 0:08:08.320 walked around, said I want to study this more. Where 0:08:08.320 --> 0:08:10.320 should I go? I got the advice to go there, 0:08:10.600 --> 0:08:13.680 took jeans class. Uh. And then at the end of 0:08:13.760 --> 0:08:16.080 his the first year, he asked somebody to ta this 0:08:16.120 --> 0:08:19.120 class next year. And I got lucky. He gave me 0:08:19.120 --> 0:08:22.600 the tap. That's great. Now you leave, you graduate, you 0:08:22.600 --> 0:08:24.840 get your your doctor. And now I left without the 0:08:24.840 --> 0:08:26.720 doctorate for Goldman. I left to take a year off, 0:08:27.480 --> 0:08:30.000 to take a year off, that's to find myself. No, 0:08:30.160 --> 0:08:34.160 I I got it eventually. It's not doctor essence because 0:08:34.160 --> 0:08:37.840 it's massively pretentious for finance. These were doctor and I'm 0:08:37.880 --> 0:08:41.920 afraid you'll ask me to check your hernia. Well, I 0:08:41.920 --> 0:08:45.400 did get the PhD along the way. So now you 0:08:45.480 --> 0:08:50.800 end up at Goldman you actually be eventually become director 0:08:50.840 --> 0:08:55.079 of Quantitative Research for asset management. At age twenty nine, 0:08:55.640 --> 0:08:58.960 you formed the Goldman Sacks Global Alpha Funds, which was 0:08:59.000 --> 0:09:03.920 a quant vehicle for deploying their capital using your quantitative metrics. 0:09:03.920 --> 0:09:07.040 That's at age twenty nine. And then sixteen years ago 0:09:07.480 --> 0:09:11.760 you found a q R, which stands for applied quantitative research. 0:09:11.760 --> 0:09:13.880 Didn't know anyone knew that anymore. Yes, I guess that, 0:09:14.000 --> 0:09:16.520 but I guess that and punched it in when it 0:09:16.600 --> 0:09:18.800 came up thought about starting our own firm. We had 0:09:18.840 --> 0:09:20.240 a whole bunch of you know, three of us who 0:09:20.240 --> 0:09:21.920 were thinking about it. Should we do this? Should we not? 0:09:22.160 --> 0:09:24.080 We ended up spending almost all the time talking about 0:09:24.080 --> 0:09:25.599 what we should name it, and we came up with 0:09:25.640 --> 0:09:28.000 the IBM of Firms, about the most boring name you 0:09:28.000 --> 0:09:30.280 can imagine, but if it's what we do exactly, and 0:09:30.320 --> 0:09:32.120 it's better because when you first see a q R, 0:09:32.160 --> 0:09:34.560 it's like, all right, it's as in this, and then ye, 0:09:34.720 --> 0:09:36.360 people are still looking for the you know they're looking 0:09:36.400 --> 0:09:38.560 for right, and I left out by the way, some 0:09:38.600 --> 0:09:42.360 of the awards top paper um from the Graham and 0:09:42.400 --> 0:09:45.040 Dot Award in two thousand three and two thousand eleven 0:09:45.640 --> 0:09:48.600 best perspectives piece for the financial analyst general? Is that 0:09:48.640 --> 0:09:51.400 what that is? Two thousand four and then the Portfolio 0:09:51.480 --> 0:09:56.800 Management Best Paper Award O one oh three and that's 0:09:56.840 --> 0:09:59.000 all the time we have. Thanks for coming by, Cliff. 0:09:59.320 --> 0:10:02.640 So so really, the first question I gotta ask you 0:10:02.720 --> 0:10:05.160 in the last minute we have in this segment is 0:10:06.160 --> 0:10:10.000 what made you decide to go into not just finance 0:10:10.320 --> 0:10:14.640 but quantitative finance. First, there was total indecision. Um. I 0:10:14.679 --> 0:10:17.079 took this. You mentioned my undergrad I was an engineer 0:10:17.120 --> 0:10:19.720 in a business school student because I had no idea 0:10:19.760 --> 0:10:22.360 what I wanted to do. I was fairly mathematical, and 0:10:22.440 --> 0:10:25.520 my father read about this program, this dual degree program, 0:10:25.720 --> 0:10:27.480 and said, why don't you do this? You can decide later. 0:10:27.760 --> 0:10:30.960 That was the total amount of planning. I like the finance. 0:10:31.600 --> 0:10:35.080 I liked I found it intellectually interesting, and to be honest, 0:10:35.600 --> 0:10:36.960 you know, you never know. You look back when you 0:10:37.000 --> 0:10:39.200 were twenty and you try to figure out if you 0:10:39.200 --> 0:10:41.440 planned it or not. Um, but I think I was 0:10:41.480 --> 0:10:44.160 attracted to the idea of something that I found intellectually fascinating, 0:10:44.600 --> 0:10:47.000 that you could make an actual career out of that. 0:10:47.120 --> 0:10:50.520 Wasn't the archaeology. I just upset all the archaeologists out there. 0:10:50.720 --> 0:10:53.120 I'm Barry, what helps. You're listening to Masters in Business 0:10:53.120 --> 0:10:56.600 on Bloomberg Radio. My guest today is Cliff Assness. He's 0:10:56.679 --> 0:11:00.839 the founder and chief investment officer of a q R, 0:11:01.080 --> 0:11:04.720 which Fortune Magazine called one of the most important and 0:11:04.880 --> 0:11:08.319 influential hedge funds in the world. Cliff, let's talk a 0:11:08.360 --> 0:11:11.760 little bit about the quant crisis of oh seven, and 0:11:11.800 --> 0:11:15.520 I'm just gonna quickly set the table. We had. We 0:11:15.559 --> 0:11:18.400 had the bear Sterns wobbling a bit, then the bear 0:11:18.440 --> 0:11:22.720 Sterns hedge funds around June of oh seven, right, they 0:11:22.760 --> 0:11:26.000 blew up and that was a whole another issue. And 0:11:26.040 --> 0:11:29.160 then we saw in August a lot of things hit 0:11:29.240 --> 0:11:32.760 the fan all at once. That was a really rough period. 0:11:33.280 --> 0:11:36.400 That began a period where let's I don't want to 0:11:36.400 --> 0:11:39.480 talk about the entire financial crisis, but the quant crisis 0:11:39.480 --> 0:11:42.760 and oh seven, you guys saw a short period of 0:11:42.800 --> 0:11:46.000 time you lost of assets that that had to be 0:11:46.160 --> 0:11:49.240 a hellish period to live through. I um, we can't 0:11:49.280 --> 0:11:51.440 do this segment because I've blocked it all out. Okay, 0:11:51.480 --> 0:11:54.560 so it's just all suppressed so before we then, let 0:11:54.559 --> 0:11:59.480 me let me try and free that up just so, 0:11:59.480 --> 0:12:02.760 so just sscribe for listeners who may not be familiar 0:12:02.800 --> 0:12:05.800 with what quants are. What is a quant what is 0:12:05.800 --> 0:12:09.320 the quantitative approach to invest? Sure? Um, there are some 0:12:09.360 --> 0:12:12.400 other people who will do quantitative techniques. I'll describe it 0:12:12.520 --> 0:12:16.160 very generally and as it applies to us. Quant investment 0:12:16.200 --> 0:12:19.720 managers are about I would say two words describing very well. 0:12:19.720 --> 0:12:23.280 They're about averages, and they're about diversification. They're not about 0:12:23.480 --> 0:12:27.240 kind of the sexy side of here's my best stock pick? Uh. 0:12:27.280 --> 0:12:29.960 Sometimes I respond if people ask me, you know, what's 0:12:29.960 --> 0:12:32.439 your favorite stock or what's your biggest holding, I look 0:12:32.440 --> 0:12:35.079 at them and go, I don't know. Which is usually true, 0:12:35.160 --> 0:12:37.160 and they get very confused because we are on thousands 0:12:37.200 --> 0:12:41.199 of But let me give you some examples. If cheap 0:12:41.200 --> 0:12:44.160 stocks measured you have any of your favorite ways, price 0:12:44.200 --> 0:12:47.280 divided by earnings, cash flow, dividend sales tend to beat 0:12:47.280 --> 0:12:51.560 expensive stocks on average over time. On average, yes, on 0:12:51.640 --> 0:12:54.319 average over time, not always, not even close to always. 0:12:54.320 --> 0:12:56.319 I wish it was always. If they tend to win, 0:12:56.920 --> 0:12:59.520 and that's all you knew and all you believed, you 0:12:59.559 --> 0:13:01.960 wouldn't bet on it by picking your three favorite cheap 0:13:01.960 --> 0:13:05.920 stocks and shorting your three least favorite expensive stocks. You 0:13:06.000 --> 0:13:07.959 believe in the average, you would do it with a 0:13:08.040 --> 0:13:11.559 very diversified portfolio of cheap and you would sell or underweight, 0:13:11.600 --> 0:13:13.520 depending if it's a hedge fund or if it's a 0:13:13.520 --> 0:13:17.640 traditional portfolio, a very diverse side portfolio of expensive and 0:13:17.800 --> 0:13:21.560 you'd hope that your logic and your historical evidence repeated 0:13:21.600 --> 0:13:24.920 itself over the next long term. We have found, along 0:13:24.960 --> 0:13:28.400 with others, this is not unique to us. A set 0:13:28.480 --> 0:13:32.200 of things that work like value is one of them. 0:13:32.240 --> 0:13:34.920 I didn't choose the random of the example randomly. You 0:13:35.000 --> 0:13:36.760 gotta be careful When I say work, I mean like 0:13:36.800 --> 0:13:39.240 a statistician two out of three years, three out of 0:13:39.280 --> 0:13:41.400 four years. If your car work like this, you'd fire 0:13:41.440 --> 0:13:44.560 your mechanic. You need an economic story why it works. 0:13:45.280 --> 0:13:46.880 I don't believe in just data. I believe in try 0:13:46.920 --> 0:13:49.080 and understand why it works. And you need a lot 0:13:49.200 --> 0:13:51.839 of out of sample tests, for instance, in value and 0:13:51.840 --> 0:13:53.920 and all and all the things we do, we have 0:13:53.920 --> 0:13:56.320 found it's not just individual stocks. We always end up 0:13:56.320 --> 0:14:00.800 discussing individual stocks, but cheap countries measured at an analogous 0:14:00.800 --> 0:14:03.520 way at the country level, Cheap bond markets using real 0:14:03.559 --> 0:14:06.560 bond yield slope of the yield curve, cheap currencies using 0:14:06.600 --> 0:14:10.160 purchasing power parity, cheap commodities using just commodities to press 0:14:10.200 --> 0:14:13.640 first day long term average. Anything we've looked at shows 0:14:13.640 --> 0:14:16.800 some tendency for cheap to beat expensive. Then other things 0:14:16.800 --> 0:14:21.280 exist momentum, which you mentioned. I wrote my dissertation on 0:14:21.920 --> 0:14:24.360 things that are getting better relatively recently tend to beat 0:14:24.360 --> 0:14:26.800 things that are getting worse. It feels like the opposite 0:14:26.800 --> 0:14:28.800 of value, but very different times. Say that again, things 0:14:28.840 --> 0:14:33.160 that are getting better relatively recently six to twelve months, um, 0:14:33.320 --> 0:14:36.040 be things that are still on a down slopes um. 0:14:36.080 --> 0:14:38.040 And this, uh, this is a bit of a blow 0:14:38.080 --> 0:14:40.640 to the efficient market hypothesis. Maybe one day people will 0:14:40.640 --> 0:14:44.520 reconcile them. Um. But that kind of shouldn't be. It's 0:14:44.520 --> 0:14:45.960 it's a little too easy. I called the new to 0:14:46.120 --> 0:14:48.600 newspaper strategy. If you're only trading price momentum, we need 0:14:48.640 --> 0:14:51.360 a newspaper from today, in a newspaper from a year ago. 0:14:52.120 --> 0:14:54.640 I think I when I when I wrote this dissertation 0:14:54.680 --> 0:14:57.520 for gene Fama, who is both efficient markets and the 0:14:57.600 --> 0:15:00.760 value Guru. I didn't say this is better than value. 0:15:00.800 --> 0:15:04.200 That would have been both wrong investing and bad graduation strategy. 0:15:04.440 --> 0:15:07.800 I said it complements value very well. They both make money. 0:15:08.000 --> 0:15:11.360 Value is a much slower turnover strategy. You often do 0:15:11.440 --> 0:15:13.840 find stocks, even though it doesn't sound common. You often 0:15:13.880 --> 0:15:16.280 find stocks that are still cheap, not as cheap as 0:15:16.280 --> 0:15:19.240 they were a year ago, but have good momentum. So 0:15:19.360 --> 0:15:21.240 both of those tend to work on average, so do 0:15:21.320 --> 0:15:24.440 other things like high quality. High profitability tends to beat 0:15:24.840 --> 0:15:28.440 poor profitability, low beta, low wrist stocks tend to beat 0:15:28.480 --> 0:15:31.280 high risk stocks. To a quant You want to trade 0:15:31.280 --> 0:15:33.840 those very diversified in as many places, not just for 0:15:33.880 --> 0:15:36.800 individual I keep saying stocks, but I have to correct myself. 0:15:38.120 --> 0:15:41.040 Anything you can trade that's liquid and you have good 0:15:41.120 --> 0:15:44.440 data on which both makes it better investment because you 0:15:44.480 --> 0:15:47.960 can spread your bets more and makes you more confident. 0:15:48.040 --> 0:15:50.320 It's not just random data mining. So I want to 0:15:50.520 --> 0:15:52.800 go back to what you said, an out of sample set, 0:15:53.320 --> 0:15:56.320 and you didn't use the words mean reversion, but essentially 0:15:56.360 --> 0:16:00.800 what you're describing is using mathematics to analyze is any 0:16:00.800 --> 0:16:03.520 place that you can put your money to work and 0:16:03.920 --> 0:16:08.280 look to take advantage of that eventual mean reversion, meaning 0:16:08.600 --> 0:16:11.160 cheap stocks will eventually get back to be fairly priced, 0:16:11.600 --> 0:16:14.080 as will expensive stocks will eventually come back down to 0:16:14.120 --> 0:16:16.600 fair If you put the two together, I would readily 0:16:16.640 --> 0:16:20.600 agree that value investing is highly related to the idea 0:16:20.640 --> 0:16:24.840 of mean reversion. They're almost almost synonyms. Um. If you 0:16:24.840 --> 0:16:26.640 add momentum in there is just that. Again, there are 0:16:26.640 --> 0:16:29.280 more that we do. But if that's the second one, UM, 0:16:29.320 --> 0:16:31.760 we would say things without a doubt mean revert. But 0:16:32.040 --> 0:16:34.040 they get there eventually. They tend to keep going the 0:16:34.040 --> 0:16:36.120 same direction for at least a little while longer before 0:16:36.120 --> 0:16:40.480 they mean. Way to put that they overshoot. And just 0:16:40.560 --> 0:16:43.120 for the lay people listening, you mentioned out of sample 0:16:43.200 --> 0:16:47.920 set um. So if we're looking at tech stocks um, 0:16:48.000 --> 0:16:51.600 or we're looking at recent data, describe how you would 0:16:51.680 --> 0:16:54.000 use an out of sample set to confirm that a 0:16:54.120 --> 0:16:56.600 sample refers to the following problem. If you give me 0:16:56.680 --> 0:17:00.440 enough data or anyone good with computers and statistics, I 0:17:00.480 --> 0:17:02.640 will find you something that has worked in the past. 0:17:03.080 --> 0:17:06.840 It might be total gibberish. One of the most famous ones, 0:17:07.400 --> 0:17:11.520 UH is butter prices in Bangladesh help predict the SNP fight. 0:17:11.600 --> 0:17:13.359 I could be mangling that, but it's something like I 0:17:13.400 --> 0:17:15.880 recall that and the same thing with the decreased number 0:17:15.920 --> 0:17:20.600 of pirates and the the pirates decreased number of pirates 0:17:20.640 --> 0:17:23.840 and the increased in in measured temperatures. People say you 0:17:23.840 --> 0:17:26.280 could randomly find any two things. The Super Bowl effects 0:17:26.280 --> 0:17:28.440 another example by after the NFC, but not just the 0:17:28.520 --> 0:17:31.879 NFC or an old because they had adjusted for the 0:17:31.880 --> 0:17:34.600 Steelers who won annoyingly often. And if it's screwed up 0:17:34.640 --> 0:17:38.960 the rule. So there's no real cure for this, but 0:17:39.040 --> 0:17:41.280 there's there's some there's something you can do. You can 0:17:41.320 --> 0:17:44.480 go look somewhere you haven't looked yet. One great out 0:17:44.480 --> 0:17:48.080 of sample test. It's time and it's now been twenty 0:17:48.080 --> 0:17:51.600 five years since my dissertation. That's frightening to say out loud, 0:17:51.840 --> 0:17:53.439 and and the stuff is held up and that's a 0:17:53.440 --> 0:17:55.679 wonderful out of sample test. But when I'm as you 0:17:55.720 --> 0:17:58.880 said twenty nine at Goldman Sachs, a good career strategy 0:17:59.000 --> 0:18:01.880 was not first, we wait twenty five years and if 0:18:01.880 --> 0:18:04.920 it works, we pounce. We keep going right. So another 0:18:04.960 --> 0:18:06.800 thing you can do is say, well, if this logic 0:18:06.840 --> 0:18:09.359 works to pick stocks in the US, doesn't work in Europe, 0:18:09.359 --> 0:18:11.320 doesn't work in Japan. All right, If it works for 0:18:11.320 --> 0:18:13.400 stocks around the world, doesn't work for bond markets, doesn't 0:18:13.400 --> 0:18:16.960 work for commodities, doesn't work for currencies. So finding these 0:18:17.000 --> 0:18:20.560 things work for other things was both lucrative because you 0:18:20.560 --> 0:18:24.040 could do it in more places, but also very calming 0:18:24.560 --> 0:18:27.199 because it made you think that's a much smaller chance 0:18:27.560 --> 0:18:30.240 that you're just lucky. It's not random. There's actually a 0:18:30.280 --> 0:18:33.760 theme underneath. I'm Barry Ridhults. You're listening to Masters and 0:18:33.800 --> 0:18:37.280 Business on Bloomberg Radio. My guest today is Cliff Assness. 0:18:37.680 --> 0:18:41.000 He's founder and c i O of the most influential 0:18:41.000 --> 0:18:42.880 hedge fund in the world. Am I giving you a promotion? 0:18:43.680 --> 0:18:46.200 What did they call you? One of the most influential hedgefund? 0:18:46.240 --> 0:18:50.600 Take that? And the irony is you've been fairly critical 0:18:50.920 --> 0:18:54.680 of the hedge fund industry in general. Let's let's talk 0:18:54.680 --> 0:18:56.960 a little bit about that. What what's your beef with 0:18:56.960 --> 0:18:59.320 with hedge Well, first, I've been a schizophrenic on the 0:18:59.359 --> 0:19:00.920 hedge fund industry. You know, it's kind of like having 0:19:00.960 --> 0:19:03.320 a little brother, if other not that they're my little brother. 0:19:03.400 --> 0:19:05.480 But if they someone else picks on your little brother, 0:19:05.520 --> 0:19:07.520 you defend them, and if your little brothers having a 0:19:07.520 --> 0:19:11.639 good day, you punch him all. We started out in 0:19:11.720 --> 0:19:13.639 the year two thousand, this is fifteen years ago. We 0:19:13.680 --> 0:19:16.199 wrote a paper called do hedge funds hedge? When I 0:19:16.280 --> 0:19:18.879 was a younger whipper snapper, and I got yelled at 0:19:18.920 --> 0:19:21.520 by half the big names in hedge funds. Was both 0:19:21.560 --> 0:19:24.800 fun and scary. Uh. And we said there to net 0:19:24.840 --> 0:19:28.400 long the word hedge implies their hedging, and they were 0:19:28.440 --> 0:19:32.880 about forty percent net long stocks, meaning if you went 0:19:32.960 --> 0:19:36.679 long a dollar in short sixty cents, you're still exposed. 0:19:37.160 --> 0:19:40.119 That that might be a good idea for total returns, 0:19:40.160 --> 0:19:41.880 but you shouldn't pay two and twenty for that because 0:19:41.920 --> 0:19:45.560 you can get net long from Jack Bogel forty. They 0:19:45.600 --> 0:19:50.440 actually Vanguard, so you're referencing ran a big study after 0:19:50.520 --> 0:19:53.760 the o A crisis, and they found that a sixty 0:19:53.800 --> 0:19:59.080 forty unleveraged portfolio beat something like the hedge funds out 0:19:59.160 --> 0:20:03.040 there and once fees they want. Well on the little 0:20:03.040 --> 0:20:05.360 brother comment, I think that's mostly right, but I'm gonna 0:20:05.400 --> 0:20:07.879 take a little issue with that. Here's the criticism. I 0:20:07.920 --> 0:20:10.600 think hedge funds. UH do a lot of very good 0:20:10.640 --> 0:20:13.720 strategies that make economic sense and have evidence behind them. 0:20:14.000 --> 0:20:18.120 Forgetting fees and forgetting hedging, merger arbitrage lending capital after 0:20:18.160 --> 0:20:20.600 a situation has occurred. You have a liquidity risk of 0:20:20.680 --> 0:20:22.359 a deal blow up risk, you get paid for that. 0:20:22.640 --> 0:20:25.960 Convertible arbitrage is largely I think a liquidity premium trend 0:20:26.000 --> 0:20:29.199 following and managed futures. I'm a momentum part of what 0:20:29.240 --> 0:20:32.600 we do. We think it works. There are others good strategies. 0:20:33.040 --> 0:20:36.240 They do them partially not fully hedged, which is weird 0:20:36.440 --> 0:20:39.680 and adds to the price because effectively you're getting a 0:20:39.800 --> 0:20:42.119 party of return from an exposure. You should get more cheaply, 0:20:42.560 --> 0:20:44.600 and then they charge a ton for it. So this 0:20:44.640 --> 0:20:46.480 is self serving because it's kind of how we do it. 0:20:46.520 --> 0:20:48.280 But we think hedge fund should fully hedge and then 0:20:48.359 --> 0:20:53.000 charge less. We wrote this paper that's critical. Some of 0:20:53.000 --> 0:20:55.640 the criticisms of hedge funds. The worst ones are when 0:20:55.640 --> 0:20:59.560 they compare them to a stocks. Now their net long 0:21:00.000 --> 0:21:03.119 long term about forty of the stock market and geeks 0:21:03.119 --> 0:21:05.720 speak a point for beta. Stock market goes up ten 0:21:05.720 --> 0:21:08.679