Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: AQR this year has been to double digit percentage returns
Speaker 2: in key strategies, and that comes at a time when
Speaker 2: many hedge funds have really been minting only marginal gains.
Speaker 2: The gains have been in long short in multi strategy,
Speaker 2: all with billionaire co founder clip Asda's trademark quantitative investing approach.
Speaker 2: All of the forefront Asness joins us. Now, of course,
Speaker 2: that is AQR Capital Management, founder, managing principle and chief
Speaker 2: investment officer.
Speaker 1: How do you do it?
Speaker 2: How do you navigate this market at this moment?
Speaker 1: Very simply, Well, first, we generally do what we always do.
Speaker 1: We are quants, which means we spread our bets out
Speaker 1: fairly wide. We divide them into categories, and you mentioned
Speaker 1: a few of them, one major one and the single
Speaker 1: best on the year is individual stock picking. Now for us,
Speaker 1: as you well know, that doesn't mean, you know, we
Speaker 1: visit one company, and we probably have about two thousand
Speaker 1: longs in a two thousand shorts, balanced by country and
Speaker 1: mostly been not entirely balanced by industry. That's been a
Speaker 1: super strong start to the year. Basically every aspect of
Speaker 1: what we do is working with the exception of famous
Speaker 1: value Investing. I actually kind of love that because sometimes
Speaker 1: people think of us too much as a value shop.
Speaker 1: So having a really strong period, but things like are
Speaker 1: the fundamentals getting better? Or is it a profitable company?
Speaker 1: Are they buying back shares or issuing shares? Is it
Speaker 1: high beta or low beta? We prefer low. Is the
Speaker 1: price momentum there, including even some newer techniques mL based,
Speaker 1: natural language processing, alternative data. It's been strong across the
Speaker 1: board except my baby from nineteen ninety value investing, but
Speaker 1: I try not to care. I just care about the total.
Speaker 1: The other thing really strong for us on the year
Speaker 1: is trend falling, and this one I'm going to brag
Speaker 1: now because it's not been a good year for trend falling.
Speaker 1: In general. Price trends in the major markets have been
Speaker 1: a disappointment. There's been a lot of whipsaw. In particular,
Speaker 1: April was very painful whipsaw. But over the last I
Speaker 1: don't know, seven years, we've diversified our trend following process
Speaker 1: to do many, many more markets, so it's more spread
Speaker 1: out and importantly to give a very significant way not
Speaker 1: just a price trend, but to a fundamental and economic
Speaker 1: trend and that's been great this year.
Speaker 2: Cliff, I feel like I could do this because I've
Speaker 2: covered the tough times and the good times here and
Speaker 2: right now for the good times for AQR. It's interesting
Speaker 2: long short fund tracked by Bloomberg is down about one
Speaker 2: percent on the year. You guys are up double digits
Speaker 2: for long short in particular for the people who can't
Speaker 2: spread their bets across thousands of firms and don't have
Speaker 2: the machines at work to help.
Speaker 1: What can they learn?
Speaker 2: It looks like it's lower risk investments that are helping
Speaker 2: you out. What are you finding that works well?
Speaker 1: The general philosophy quants believe, and there's some difference is
Speaker 1: some of the more modern again the mL they'll try
Speaker 1: of data. This analogy doesn't work for. But the core
Speaker 1: things that quantitative investors believe in are not so dissimilar
Speaker 1: to what a classic Graham and Dodd investor would believe in.
Speaker 1: We believe in profitable companies that are reasonable multiple where
Speaker 1: the fundamentals are getting better, where they're buying back rather
Speaker 1: than issuing shares, and all SQL and it's always all
Speaker 1: all s equal because everything's done at once. We can
Speaker 1: love a company with a high beta, but all sql
Speaker 1: we prefer lower market risk. Obviously, as a quant I'm
Speaker 1: not skilled at doing this, But if I were to
Speaker 1: do more concentrated investments, I would use these things as
Speaker 1: a screen. I'd use it as where do I fish?
Speaker 1: I want companies that look like this. Then a traditional
Speaker 1: manager's job is to get the specifics right. They can
Speaker 1: do wonderful and do things we can't do if they
Speaker 1: hit a home run in one specific stock, and they
Speaker 1: can utterly get destroyed if they get it wrong. We're
Speaker 1: betting on the statistical average of good investing working. They
Speaker 1: are betting on applying good investing to specific situations, and
Speaker 1: both can work and both cannot work, but they are.
Speaker 1: In fact, It's a great question because I think they
Speaker 1: are more similar than people sometimes realize in philosophy, if
Speaker 1: not in execution.
Speaker 3: By the way, it reminds me of you know, when
Speaker 3: you say stock picking, I think of a random walk
Speaker 3: down Wall Street. And when we were kids, the Wall
Speaker 3: Street Journal did this experiment where they had staff members
Speaker 3: through a dart at a board, and often that was
Speaker 3: a better way to pick stocks than Wall Street analysts,
Speaker 3: who were paid gazillions or at the time maybe hundreds.
Speaker 1: Of thousands of dollars. You know, so yeah, and I'm
Speaker 1: sure if they redid that study, it's still true. If
Speaker 1: I want to get really geeky, I'll tell you that
Speaker 1: throwing darts gets you a big small cap microcap bias
Speaker 1: because there's a lot more of them. But let's the
Speaker 1: principle is correct. Active management picking specific stocks, be it
Speaker 1: a concentrated manager or a very diverse did long short
Speaker 1: manager's fully hedged is inherently an arrogant act. I know
Speaker 1: anyone who's followed me will be shocked that I will
Speaker 1: do an arrogant act. But the average can't win. Jack
Speaker 1: Bogel was right, you add up everyone. It adds up
Speaker 1: to the market. Some people underperform, some outperform, and the
Speaker 1: average after fees and costs underperforms. So no one can
Speaker 1: get around from that. With that, we need active management
Speaker 1: in the world. We can't have a world of one
Speaker 1: hundred percent indexing. That's a really weird world. What happens
Speaker 1: when nobody is looking at prices and good active managers
Speaker 1: I think can do well. But to believe you're one
Speaker 1: of the good ones is an inherently arrogant act. So
Speaker 1: I don't disagree. I certainly don't disagree with Burton at all.
Speaker 1: I do think for someone who doesn't think they have
Speaker 1: an edge or can find someone with an edge that
Speaker 1: unfortunately he's passed. But I used to love to say,
Speaker 1: my friend Jack Bogel is not a bad alternative, right.
Speaker 4: Right, And to that point, I'm speaking to David with
Speaker 4: the co founder of Dimensional at twelve thirty and I
Speaker 4: believe we'll have a pretty similar conversation about that. But
Speaker 4: I want to talk about your market neutral strategy, your
Speaker 4: market neutral fund as well, because I was.
Speaker 1: Playing around with some charts.
Speaker 4: It's also up about fifteen percent on a total return
Speaker 4: basis this year. It's outperforming the S and P five
Speaker 4: hundred over the last five years, but a lot of
Speaker 4: that outperformance has come specifically from the past year.
Speaker 1: We were just speaking.
Speaker 4: With Gargey Chowdery over at Blackrock and she said that
Speaker 4: right now she would be looking at market neutral strategies.
Speaker 1: So why is.
Speaker 4: Market neutral working so well in this specific environment.
Speaker 1: I'm going to give you a very unsatisfying answer. Oh no,
Speaker 1: of course, we bet on these multiple themes, and I'm
Speaker 1: only giving you a few of them. There are hundreds
Speaker 1: of factors in our model, and one thing quants are
Speaker 1: really bad at is telling a story about what. In fact,
Speaker 1: when we can tell a story, it's usually bad news.
Speaker 1: It's all value has gone so crazy, it's dominating what
Speaker 1: we do and we have to stick with it. Oh,
Speaker 1: and it's come back and the round trip has been go.
Speaker 1: But there's a story. This year, there's been a tremendous
Speaker 1: return x value to what we would call basic rational investing,
Speaker 1: and I think you see that with maybe Europe out
Speaker 1: performing the US, and that's one place. Value probably has
Speaker 1: helped because Europe has been cheaper, but the market has
Speaker 1: rewarded good companies that are getting better that aren't too risky.
Speaker 1: We're not in a bubble period, and basically a bubble
Speaker 1: period is the only period I fear. Doesn't mean we
Speaker 1: won't do poorly at other times, I think we make
Speaker 1: money much more of it than we don't, but we can.
Speaker 1: We can get it wrong in any environment, but in
Speaker 1: a bubble both valuation strategies and fundamentals get thrown out
Speaker 1: the window. And that is very hard in those times
Speaker 1: sticking with your process and having the wherewithal to see
Speaker 1: it through I think can make you a lot of
Speaker 1: money round trip, including the tough times. You know, those
Speaker 1: are the tough ones.
Speaker 2: Speaking of tough times, it looks like a lot of
Speaker 2: people are still keeping.
Speaker 1: Money on the sidelines for a rainy day.
Speaker 2: If you look at what money market fund assets have
Speaker 2: been doing, they've been drawn down.
Speaker 1: A little bit, but not buy very much.
Speaker 2: They've really climbed. What do you tell people who are
Speaker 2: sitting in cash and looking for the right buying opportunity
Speaker 2: right now?
Speaker 1: First, you know, a pet peeve of mine is the
Speaker 1: phrase money's on the sidelines, cash on the sidelines.
Speaker 3: Yeah, I've been hearing it for twenty five years.
Speaker 1: Cliff Under the moment, everyone says it, and what you
Speaker 1: generally mean is people have embarrassed tin to them. But
Speaker 1: what I always do, this is really geeky, But if
Speaker 1: you try to get to the sidelines and sell your stocks,
Speaker 1: you got to sell them to someone who just left
Speaker 1: the sidelines. With that said, I think a lot of
Speaker 1: managers are cautious and a lot of individual investors may
Speaker 1: be less so. On the individual side, our view on
Speaker 1: timing the market, I co authored a paper with one
Speaker 1: of my partners, Anti Illminent. I'm having a good day
Speaker 1: because I nailed this name. I've only known Anti for
Speaker 1: almost forty years, but it's still you know, if you're
Speaker 1: having a tough day, it's finished. It's a mouthful. But
Speaker 1: we wrote a paper an institutional investor called Sin a
Speaker 1: Little about timing the market, and it's a subtlety. You know,
Speaker 1: it's easy to tell people never do this. You're a
Speaker 1: disaster if you do this, And it's easy to tell
Speaker 1: people even if it doesn't work out, get out now.
Speaker 1: But Sin a Little says market timing is pretty freaking hard.
Speaker 1: Combinations of basic things like trend following and valuation we
Speaker 1: think do add some value long term. When the market
Speaker 1: looks cheap and has been doing well lately on price
Speaker 1: and fundamentals, we do think it's you can overweight somewhat
Speaker 1: and vice versa. But the risk adjustin returns on that
Speaker 1: trade are still low, so I think on net we're
Speaker 1: probably close to neutral, maybe a little negative. Valuations is
Speaker 1: pretty bad, particularly for US docs. The trend has gotten weaker,
Speaker 1: but it's still because we look it up to about
Speaker 1: a year horizon, still pretty decent. They're balancing out to
Speaker 1: a pretty wimpy view. But I encourage wimpiness on this.
Speaker 1: I don't know if there's anyone there who can do it,
Speaker 1: but I think the universe of people who can can
Speaker 1: can add a lot of value from really pure timing
Speaker 1: is exceptionally small. One element of hypocrisy. What we do
Speaker 1: in trend following takes net long and short positions, so
Speaker 1: that will average flat the market, so that in a
Speaker 1: very long term sense it is not timing but short term.
Speaker 1: Of course, if you're doing trend following, you have lungs
Speaker 1: and shorts. But even there we spread the bets pretty
Speaker 1: far and wide.
Speaker 4: And Cliff, we were having this conversation last week on
Speaker 4: my podcast with Matt Levine Money Stuff about this push
Speaker 4: really to put private assets in the hands of retail investors,
Speaker 4: either through ETFs or interval funds. The list goes on.
Speaker 4: You said that you were going to head yourself, and
Speaker 4: then you said it's a terrible idea. And I'm hoping
Speaker 4: you can just expand on that a little bit.
Speaker 1: Why exactly what me to me is the whole thing's
Speaker 1: not going to be fair.
Speaker 4: Was that a good setup?
Speaker 1: I said that last week? Yeah, I don't. My opinion
Speaker 1: has completely changed. Tell us all right, I have some
Speaker 1: cynicism about where we are in the private world. I've
Speaker 1: written about this. I don't think they're necessarily bad investments
Speaker 1: by any means. They may make a lot of money.
Speaker 1: My cynicism is mainly about people understanding the risks. You know,
Speaker 1: we try to create assets that are very low correlation
Speaker 1: of markets by shorting as much as we're long. I
Speaker 1: think we make money long term. I think we've made
Speaker 1: a lot of money long term. But that doesn't make
Speaker 1: a great investment. You have to do it well. But
Speaker 1: it does really hedge. It creates something that's not very correlated.
Speaker 1: Privates are simply long only equities, usually with some leverage applied,
Speaker 1: and they look uncorrelated because they just don't tell you
Speaker 1: the price is very often, and they can. They could
Speaker 1: tell you every day, well, market went up, and we
Speaker 1: know what our multiples are to the market, and it's
Speaker 1: worth this today. So I don't think they're a true
Speaker 1: alternative frankly in the sense an alternative way to buy
Speaker 1: long only equities, and as such, they've gotten extremely popular,
Speaker 1: partly because many of them have done very well, but
Speaker 1: partly because we've been in a massive equity bull market
Speaker 1: forever and selling equity exposure with reported risks that's lower,
Speaker 1: not real risk, but reported risk turns out to be
Speaker 1: a great business model. So it does feel like a
Speaker 1: crowded place. It feels like not having to mark to market.
Speaker 1: Being a liquid used to be when David Swinson pioneered
Speaker 1: at Yale, used to be a bug that you got
Speaker 1: paid for. Bearing a bug is you don't want this,
Speaker 1: You don't want a liquid, so you need extra return
Speaker 1: to compensate you. And he was brilliant at monetizing that. Well,
Speaker 1: if it's a feature now, because it simply makes investments
Speaker 1: easier to live with because you don't have to look.
Speaker 1: You pay for a feature through lower returns. So they'll
Speaker 1: be winners, they'll be great firms. I think some of
Speaker 1: the firms out there, I'm less specific. You could no,
Speaker 1: I'm not going to go there, but there are some
Speaker 1: I really think we'll navigate this well. Yeah, but as
Speaker 1: an industry, I think people think they're way too low risk,
Speaker 1: they're way too popular, and they may have market or
Speaker 1: sub market returns as what was once a bug is
Speaker 1: a feature that you pay for in terms of return.
Speaker 1: So with all that said, hey, if you have those
Speaker 1: concerns and You don't have to agree with me, but
Speaker 1: if you share those concerns, saying, hey, you know what
Speaker 1: we should do? We have all these things, you know,
Speaker 1: who would buy this? Now, retail doesn't always work out
Speaker 1: for retail.
Speaker 4: Well, one of the pushbacks here because private assets.
Speaker 1: Of course, we're also talking.
Speaker 4: About private companies, and there's the argument out there is
Speaker 4: that companies are staying private much longer, and some of
Speaker 4: the highest growth and most exciting companies I'm thinking Stripes, SpaceX,
Speaker 4: open Ai, the list goes on, are in the private markets,
Speaker 4: and perhaps retail should have access to that innovation. I
Speaker 4: wonder if that holds water with you.
Speaker 1: Directionally, I buy the argument there has been a shift
Speaker 1: to more private. It doesn't make them necessarily fairly priced investments.
Speaker 1: You know, the private world has changed. It used to
Speaker 1: have more of a value flavor. The old LBO of
Speaker 1: this company is too cheap. It has somewhat, at least
Speaker 1: to my casual observation, switched to a little bit more
Speaker 1: of a growth investment, which also makes it probably a
Speaker 1: riskier investment. And it's a riskier investment that's still not
Speaker 1: reporting its daily risk. So I'll give you part of
Speaker 1: that argument. I wouldn't say private should not be part
Speaker 1: of a portfolio. I sit on quite a few investment
Speaker 1: committees over my time, and I never stand up and
Speaker 1: bang my fist and say we have to get out
Speaker 1: of these. But I do say we should be treating
Speaker 1: them as risky or more risky than the stock market.
Speaker 1: And that is not always the case. Sometimes you see,
Speaker 1: I'll be geeky for a second, like I'm ever not geeking. Yeah,
Speaker 1: if markets have a fifteen six to twenty percent annual volatility,
Speaker 1: you'll see people put out graphics where it's like privates
Speaker 1: four percent, And yeah, those are the reported numbers, but
Speaker 1: I promise you the actual number is thirty two percent.
Speaker 1: So if I worry about some institutions not getting that,
Speaker 1: I worry more about retail not getting it. Shanali will
Speaker 1: explain that to me after the thirty five is bigger
Speaker 1: than fifteen.
Speaker 3: No, No, I mean if the numbers reporters are four. Anyway,
Speaker 3: I have a different question, a different kind of line
Speaker 3: of questioning here, which is I think AQR is one
Speaker 3: of the most interesting from an academic standpoint firms out there.
Speaker 3: I mean, I love have always loved the quant Jim
Speaker 3: Simons and everybody who's doing your work, because you're so
Speaker 3: closely involved with universities, and I think of the University
Speaker 3: of Chicago when I think of AQR, and I wonder
Speaker 3: what you make of this push to reduce foreign students
Speaker 3: studying here in America because President Trump recently study things
Speaker 3: Harvard should only have fifteen percent foreign students, they have
Speaker 3: like twenty seven percent. I looked up Universe Chicago twenty
Speaker 3: four percent. And you work so closely with these students
Speaker 3: and professors, So what does it mean to you.
Speaker 1: Well, you know, I'm going to try to stay as
Speaker 1: a political as possible because I want to survive the week. Yeah,
Speaker 1: I will speak purely as a self serving consumer of
Speaker 1: great researchers. We have found the great students at great
Speaker 1: PhD programs and even at great NBA programs to be
Speaker 1: a tremendous resource for AQR. Not all of them by
Speaker 1: any means, but a fairly decent number have been international students.
Speaker 1: And as a business person, I'm certainly concerned about that
Speaker 1: drying up. It's been a real talent pool that I
Speaker 1: think makes them better off and makes us better off.
Speaker 1: I don't think they're necessarily they're only taking American jobs
Speaker 1: if we find them better than the Americans, and we
Speaker 1: don't always buy any means there are a lot of great Americans,
Speaker 1: but reducing the talent pool for us is a negative,
Speaker 1: and I imagine we can't be the only one, so
Speaker 1: I think it is somewhat anti growth to reduce the
Speaker 1: talent pool. A lot of some of these people go
Speaker 1: back to their home country, but a lot of state
Speaker 1: in the United States. So there are aspects of what
Speaker 1: President Trump is doing. There's some messed up things in
Speaker 1: the university world, and he doesn't have a whole lot
Speaker 1: of levers, so maybe he's using what he thinks he
Speaker 1: needs to use. But this I don't like.