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AQR this year has been to 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 clip Asda's trademark quantitative investing approach. All of the forefront Asness joins us. Now, of course, that is AQR Capital Management, founder, managing principle and chief investment officer.
How do you do it?
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, you know, we visit one company, and we probably have about two thousand longs in a two thousand shorts, balanced by country and
mostly been 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? Or 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 nineteen ninety 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 falling, and this one I'm going to brag now because it's not been a good year for trend falling.
In general. Price trends in the major markets have been a disappointment. There's been a lot of whipsaw. In particular, 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 way not just a price trend, but to a 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 one percent 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 difference is some of the more modern again the mL they'll try of data. This analogy doesn't work for. But 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 SQL and it's always all
all s equal because everything's done at once. We can love a company with a high beta, but all sql we prefer lower market risk. 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 get destroyed if they get it wrong. We're betting on the statistical average of good investing working. They are 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 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 through 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, 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 a big small cap microcap bias because there's a lot more of them. But let's the principle is correct. Active management picking specific stocks, be it a concentrated manager or a very diverse did long short manager'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 Bogel 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 one hundred percent indexing. That's a really weird world. What happens when nobody is 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 Bogel is not a bad alternative, right.
Right, And to that point, I'm speaking to David with the co founder of Dimensional at twelve thirty 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 fifteen percent on a total return basis this year. It's outperforming the S and P five hundred over the last five years, but a lot of that outperformance has come specifically from the past year.
We were just speaking.
With Gargey Chowdery 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, of course, 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 all 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 go.
But 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 out performing the US, and that's one place. Value probably has helped because Europe has been cheaper, but 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 of it than we don't, but we can. 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. You know, 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 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 twenty five years.
Cliff Under the moment, everyone says it, and what you generally mean is people have embarrassed tin to them. But what I always do, 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 may be less so. On the individual side, our view on timing the market, I co authored a paper with one
of my partners, Anti Illminent. I'm having a good day because I nailed this name. I've only known Anti for almost forty years, but it's still you know, if you're having a tough day, it'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 Sin a Little 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 it's you can overweight somewhat and vice versa. But the risk adjustin returns on that trade are still low, so I think on net we're probably close to neutral, maybe a little negative. Valuations is
pretty bad, particularly for US docs. The trend has gotten weaker, but it's still because we look it 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 can 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 that in a very long term sense it is not timing but short term. Of course, if you're doing trend following, you have lungs 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 head 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 what me to me is the whole thing's not going to be fair.
Was that a good setup?
I said that last week? Yeah, I don't. 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. You know, we try to create assets that are very low correlation of markets by shorting as much as we're long. I think we make money long term. I think we've 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 price is very often, and they can. 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 the sense 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 risks that's lower, not real risk, but reported risk turns out to be a great business model. So it does feel like a
crowded place. It feels like not having to mark to market. Being a liquid used to be when David Swinson 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 a liquid, 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. You pay for a feature through lower returns. So they'll
be winners, they'll be great firms. I think some of the firms out there, I'm less specific. You could no, I'm not going to go there, but there are some I really think we'll 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 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 Stripes, SpaceX, open Ai, 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 private. 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 of 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 a riskier investment. 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, like I'm ever not geeking. Yeah, if markets have a fifteen six to twenty percent annual volatility, you'll see people put out graphics where it's like privates four percent, And yeah, those are the reported numbers, but I promise you the actual number is thirty two percent. 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 the thirty five is bigger than fifteen.
No, No, I mean if the numbers reporters are four. 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 have 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 when I think of AQR, and I wonder what you make of this push to reduce foreign students studying here in America because President Trump recently study things Harvard should only have fifteen percent foreign students, they have like twenty seven percent. I looked up Universe Chicago twenty
four percent. And you work so closely with these students and professors, So what does it mean to you.
Well, you know, I'm going to try to stay as a political as possible because I want to survive the week. Yeah, 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 NBA 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 up. It's been a real talent pool that I think makes them better off and makes us 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 buy 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. A lot of some of these people go back to their home country, but a lot of state in the United States. So 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 to use. But this I don't like.