Clifford Asness is the founding principal of AQR Capital Management. AQR is a US based, SEC registered investment advisor with approximately US$98bn under management in asset allocation and stock selection strategies which are mostly quantitatively implemented. Asness is a regular contributor to the Financial Analysts Journal and a deep thinking investor. In the latest copy of the FAJ he has a bit of fun by articulating a list of peeves. The full article is available by clicking here.
He observes a number of statements which are all too familiar and infuriating to hear; Commentators observe “bubbles” far too regularly, we agree, US Treasury Bills offers an exceptionally low return, but a return which can be justified by a reasonable argument nonetheless. Baltimore Technologies, in December 1999 certainly did not. “Arbitrage” is too often used to describe “a trade we like” rather than its true definition; “a riskless profit”. We’ve encountered this all too often in our often search for skilled investment managers. Then there are the market strategists who tell us about “cash on the side-lines”; there are no side-lines!
As a practitioner, Asness embraces technological advance; while some view High-Frequency Trading as a black-box evil, Asness rightly observes that market making on this basis has lowered the taxes that are transaction costs to the benefit of all market participants. He is less welcoming of “smart beta”. First, these products do not track market cap weighted benchmarks and should therefore be viewed as active strategies and not “better ways to gain market exposure”. Second, many implement a value and momentum strategy which are two factors very close to Asness’ heart.
Our view of risk is the chance of a permanent loss of capital. Asness doesn’t disagree but is quick to remind us that only dumb quants would use volatility without a corresponding expected return. I wonder what reaction “minimum variance strategy” elicits?