AQR Founder & CIO Cliff Asness Talks Buying Opportunities
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Bloomberg Audio Studios. Podcasts, radio, news. AQR this year has minted double-digit percentage returns in key strategies, and that comes at a time when many hedge funds have really been minting only marginal gains. The gains have been in long-short, in multi-strategy, all

with billionaire co-founder Cliff Asness's trademark quantitative investing approach all at the forefront. Asness joins us now. Of course, that is AQR Capital management founder, managing principal, and chief investment officer. How do you navigate this market at this moment, very simply? Well, first, we generally do what we always do. We are quants, which means we spread our bets out fairly wide. We divide them into categories, and you mentioned a few of them.

One major one and the single best on the year is individual stock picking. Now for us, as you well know, that doesn't mean we visit one company and we probably have about 2,000 longs and about 2,000 shorts balanced by country and mostly but not entirely balanced by industry. That's been a super strong start to the year. Basically every aspect of what we do is working with the exception of famous value investing.

I actually kind of love that because sometimes people think of us too much as a value shop, so having a really strong period. But things like are the fundamentals getting better? Is it a profitable company? Are they buying back shares or issuing shares? Is it high beta or low beta? We prefer low. Is the price momentum there?

including even some newer techniques, ML-based, natural language processing, alternative data. It's been strong across the board except my baby from 1990, value investing. But I try not to care. I just care about the total. The other thing really strong for us on the year is trend following. And this one, I'm going to brag now because it's not been a good year for trend following in general.

Price trends in the major markets have been a disappointment. There's been a lot of whipsaw, particularly April was very painful whipsaw. But over the last, I don't know, seven years, we've diversified our trend following process to do many, many more markets. So it's more spread out.

and importantly, to give a very significant weight not just to price trend but to fundamental and economic trend. And that's been great this year. Cliff, I feel like I could do this because I've covered the tough times and the good times here. And right now, for the good times for AQR, it's interesting. Long short fund tracked by Bloomberg is down about 1% on the year. You guys are up double digits. For long short in particular, for the people who can't spread their bets across thousands of firms and don't have the machines at work to help,

What can they learn? It looks like it's lower risk investments that are helping you out. What are you finding that works? Well, the general philosophy quants believe, and there's some differences, some of the more modern, again, the ML, the alternative data, this analogy doesn't work for.

The core things that quantitative investors believe in are not so dissimilar to what a classic Graham and Dodd investor would believe in. We believe in profitable companies that are reasonable multiple, where the fundamentals are getting better, where they're buying back rather than issuing shares, and all is equal. And it's always all is equal because everything's done at once. We can love a company with a high beta, but all is equal. We prefer lower beta.

Obviously, as a quant, I'm not skilled at doing this, but if I were to do more concentrated investments, I would use these things as a screen. I'd use it as, where do I fish? I want companies that look like this. Then a traditional manager's job is to get the specifics right. They can do wonderful and do things we can't do if they hit a home run in one specific stock, and they can utterly counteract

get destroyed if they get it wrong. We're betting on the statistical average of good investing working. They're betting on applying good investing to specific situations. And both can work and both cannot work. But they are, in fact, it's a great question because I think they are more similar situations.

than people sometimes realize in philosophy, if not in execution. By the way, it reminds me of, you know, when you say stock picking, I think of a random walk down Wall Street. And when we were kids, the Wall Street Journal did this experiment where they had staff members throw a dart at a board. And often that was a better way to pick stocks than Wall Street analysts who were paid gazillions or at the time, maybe hundreds of thousands of dollars, you know, so. Yeah.

Yeah, and I'm sure if they redid that study, it's still true. If I want to get really geeky, I'll tell you that throwing darts gets you big small cap, micro cap bias because there are a lot more of them. But the principle is correct. Active management, picking specific stocks, be it a concentrated manager or a very diversified long short manager who's fully hedged,

is inherently an arrogant act. I know anyone who's followed me will be shocked that I will do an arrogant act, but the average

Can't win. Jack Bogle was right. You add up everyone, it adds up to the market. Some people underperform, some outperform, and the average after fees and costs underperforms. So no one can get around from that. With that, we need active management in the world. We can't have a world of 100% indexing. That's a really weird world. What happens when nobody's looking at prices? And good active managers, I think, can do well.

but to believe you're one of the good ones is an inherently arrogant act. So I don't disagree, I certainly don't disagree with Burton at all. I do think for someone who doesn't think they have an edge or can find someone with an edge, that unfortunately he's passed, but I used to love to say,

My friend Jack Bogle is not a bad alternative. Right, right. And to that point, I'm speaking to David Booth, the co-founder of Dimensional at 1230. And I believe we'll have a pretty similar conversation about that. But I want to talk about your market neutral strategy, your market neutral fund as well, because I was playing

around with some charts, it's also up about 15% on a total return basis this year. It's outperforming the S&P 500 over the last five years, but a lot of that outperformance has come specifically from the past year. We were just speaking with Gargi Chowdhury over at BlackRock.

And she said that right now she would be looking at market neutral strategies. So why is market neutral working so well in this specific environment? I'm going to give you a very unsatisfying answer. Oh, no. Because we bet on these multiple themes. And I'm only giving you a few of them. There are hundreds of factors in our model. And one thing quants are really bad at.

is telling a story about what, in fact, when we can tell a story, it's usually bad news. It's, oh, value has gone so crazy, it's dominating what we do and we have to stick with it. Oh, and it's come back and the round trip has been good. There's a story.

This year there's been a tremendous return, X value, to what we would call basic rational investing. And I think you see that with maybe Europe outperforming the U.S. And that's one place value probably has helped because Europe has been cheaper.

The market has rewarded good companies that are getting better that aren't too risky. We're not in a bubble period. And basically a bubble period is the only period I fear. Doesn't mean we won't do poorly at other times. I think we make money much more often than we don't, but we can get it wrong in any environment. But in a bubble, both valuation strategies and fundamentals get thrown out the window.

And that is very hard in those times. Sticking with your process and having the wherewithal to see it through, I think, can make you a lot of money round trip, including the tough times. But those are the tough ones. Speaking of tough times, it looks like a lot of people are still keeping money on the sidelines for a rainy day. If you look at what money market fund assets have been doing, they've been drawn down a little bit, but not significantly.

buy very much. They've really climbed. What do you tell people who are sitting in cash and looking for the right buying opportunity right now? First, you know, a pet peeve of mine is the phrase money's on the sidelines. Cash on the sidelines? Yeah. I've been hearing it for 25 years, Cliff. Under the mattress. Everyone says it. And what you generally mean is people have a bearish tint to them. But what I always, this is really geeky, but if you try to get to the sidelines and sell your stocks, you got to sell them to someone who just left

the sidelines. With that said, I think a lot of managers are cautious and a lot of individual investors maybe less so on the individual side. Our view on timing the market

I co-authored a paper with one of my partners, Antti Illmanen. I'm having a good day because I nailed his name. I've only known Antti for almost 40 years, but it's still, you know, if you're having a tough day, he's finished. It's a mouthful. But we wrote a paper, an institutional investor called Sin A Little.

about timing the market. And it's a subtlety. You know, it's easy to tell people never do this, you're a disaster if you do this, and it's easy to tell people even if it doesn't work out, get out now! But Sinalittle says market timing is pretty freaking hard.

Combinations of basic things like trend following and valuation we think do add some value. Long term when the market looks cheap and has been doing well lately on price and fundamentals, we do think you can overweight somewhat and vice versa. But the risk adjusted returns on that trade are still low.

So I think on net, we're probably close to neutral, maybe a little negative. Valuation's pretty bad, particularly for U.S. stocks. The trend has gotten weaker, but it's still, because we look at up to about a year horizon, still pretty decent. They're balancing out to a pretty wimpy view, but I encourage wimpiness on this. I don't know if there's anyone there who can do it, but I think the universe of people who can add a lot of value from really

pure timing is exceptionally small. One element of hypocrisy, what we do in trend following, takes net long and short positions. So that will average flat the market. So in a very long-term sense, it is not timing. But short-term, of course, if you're doing trend following, you have longs and shorts. But even there, we spread the bets pretty far and wide. And Cliff, we were having this conversation last week on my podcast with Matt Levine, Money Stuff, about

this push really to put private assets in the hands of retail investors, either through ETFs or interval funds, the list goes on. You said that you were going to hedge yourself and then you said it's a terrible idea. And I'm hoping you can just expand on that a little bit. Why exactly is it so terrible? Well, if you're going to quote me to me, this whole thing's not going to be fair. Was that a good setup though? I said that last week. Yeah. My opinion has completely changed. Tell us. All right. I have some cynicism about where we are in the private world.

I've written about this. I don't think they're necessarily bad investments by any means. They may make a lot of money. My cynicism is mainly about people understanding the risks. We try to create assets that are very low correlation to markets by shorting as much as we're long. I think we make money long term. I think we made a lot of money long term, but that doesn't make a great investment. You have to do it well, but it does really hedge. It creates something that's not very correlated.

Privates are simply long only equities, usually with some leverage applied. And they look uncorrelated because they just don't tell you the prices very often. And they can't.

They could tell you every day, well, market went up and we know what our multiples are to the market and it's worth this today. So I don't think they're a true alternative, frankly, in a sense. They're an alternative way to buy long only equities. And as such, they've gotten extremely popular, partly because many of them have done very well.

but partly because we've been in a massive equity bull market forever and selling equity exposure with reported risk that's lower, not real risk, but reported risk, turns out to be a great opportunity

business model. So it does feel like a crowded place. It feels like not having to mark to market, being illiquid used to be, when David Swenson pioneered at Yale, used to be a bug that you got paid for bearing. A bug is you don't want this. You don't want illiquid. So you need extra return to compensate you. And he was brilliant at monetizing that.

Well, if it's a feature now, because it simply makes investments easier to live with because you don't have to look. Right. You pay for a feature through lower returns. So there'll be winners. There'll be great firms. I think some of the firms out there, I won't list specific. You could. No, I'm not going to go there. But there are some I really think will navigate this well. Yeah. But as an industry...

I think people think they're way too low risk, they're way too popular, and they may have market or sub-market returns as what was once a bug is a feature that you pay for in terms of return. So with all that said, hey, if you have those concerns, and you don't have to agree with me, but if you share those concerns, saying, hey, you know what we should do? We have all these things. You know who would buy this now? Retail? Mm-hmm.

Doesn't always work out for retail. Well, one of the pushbacks here, because private assets, of course, we're also talking about private companies. And there's the argument out there is that companies are staying private much longer. And some of the highest growth and most exciting companies, I'm thinking Stripe, SpaceX, OpenAI, the list goes on, are in the private markets. And perhaps retail should have access to that innovation. I wonder if that holds water with you. Directionally, I buy the argument. There has been a shift to more

It doesn't make them necessarily fairly priced investments. You know, the private world has changed. It used to have more of a value flavor. The old LBO, this company is too cheap. It has somewhat, at least to my casual observation, switched to a little bit more of a growth investment, which also makes it probably riskier.

And it's a riskier investment that's still not reporting its daily risk. So I'll give you part of that argument. I wouldn't say private should not be part of a portfolio. I sit on quite a few investment committees over my time and I never stand up and bang my fist and say we have to get out of these. But I do say we should be treating them as risky or more risky than the stock market.

And that is not always the case. Sometimes you see, I'll be geeky for a second, well, like I'm ever not geeky. If markets have a 15, 6 to 20% annual volatility, you'll see people put out graphics where it's like privates, 4%. And yeah, those are the reported numbers. But I promise you, the actual number is 32%. So if I worry about some institutions not getting that, I worry more about retail.

Not getting it. Shanali will explain that to me after. I'll do it. 35 is bigger than 15. No, no. I mean, if the numbers, reporters are for. Anyway, I have a different question, a different kind of line of questioning here, which is I think AQR is one of the most interesting from an academic standpoint firms out there. I mean, I love I've always loved the quant. Jim Simons and everybody who's doing your work.

because you're so closely involved with universities and i think of the university of chicago and i think of a qr and i wonder what you make of this uh... pushed to reduce foreign students studying here in america because president trump recently said he thinks harvard should only have fifteen percent foreign students they have a twenty seven percent i looked up university of chicago twenty four percent and you work so closely with these students and professors so what does it mean to you well uh... you know

I'm going to try to stay as apolitical as possible because I want to survive the week. I will speak purely as a self-serving consumer of great researchers. We have found...

the great students at great PhD programs and even at great MBA programs to be a tremendous resource for AQR. Not all of them by any means, but a fairly decent number have been international students. And as a business person, I'm certainly concerned about that drying. It's been a real talent pool that I think makes them better off and makes us better

better off. I don't think they're necessarily, they're only taking American jobs if we find them better than the Americans. And we don't always by any means. There are a lot of great Americans, but reducing the talent pool for us

is a negative and I imagine we can't be the only one. So I think it is somewhat anti-growth to reduce the talent pool. Some of these people go back to their home country, but a lot stay in the United States. There are aspects of what President Trump is doing. There's some messed up things in the university world and he doesn't have a whole lot of levers, so maybe he's using what he thinks he needs

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