Cliff Asness of AQR Capital Management, joined Stephanie Ruhle, David Westin and Erik Schatzker on Bloomberg TV’s new flagship morning program, Bloomberg <GO>. He discussed market reaction to the Paris terror attacks and the use of long-term investing to overcome risks.
Cliff Asness on why hedge fund returns are down:
“They don’t hedge enough and they charge too much. Over time what they are supposed to do is hedge out the market risk, provide a return that’s independent of the market, these famous uncorrelated diversifying returns. And they’re supposed to do it at a reasonable price.”
Cliff Asness on the market reaction to the terrorist attacks in Paris:
“As a person you weep, but as a long-term investor you do your best to ignore. term I would say the markets are reacting very rationally. And I’m probably more of a contrarian. Medium to long-term, this doesn’t drive markets. This is a human tragedy, but it doesn’t drive markets. ”
Cliff Asness: Markets Reacting to Paris Attack ‘Rationally’
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Cliff Asness: Hedge Funds Charge Too Much, Returns Down
ERIK SCHATZKER: As I mentioned moments ago, Cliff Asness of AQR is here. Cliff, if we could begin with a little bit on the way investors tend to think about events like the terrorist attacks in Paris on Friday, Matt showed us that things haven’t really moved that much. And frankly if you look at the historic record, things don’t move that much over time after these horrible incidents. So, again, as the investor, as a man who sits on top of $135 billion and, granted, not all of your strategies would speak to this, why is that the case?
Cliff Asness: Well as a person you weep, but as a long-term investor you do your best to ignore. I don’t think it matters very much. As a medium or short-term investor, it’s not our strong suit. We’re not timing these things, but if I had to, I’m probably a more contrarian than anything else, the whole — the old Rothschild quote, what is it, buy on the cannon, sell on the trumpets. I’m not the guy to give short-term advice, but if I had any inclination short term I would say the markets are reacting very rationally. And I’m probably more of a contrarian. Medium to long-term, this doesn’t drive markets. This is a human tragedy, but it doesn’t drive markets.
STEPHANIE RUHLE: The demands they put on you, the time horizons that they’ve created, the fact that they change things so much, how can one be a long-term investor when the people who are giving you the big bucks won’t allow it?
Cliff Asness: I think a lot of the people giving us or others the big bucks are better than you think. I think there is this trend. I’m not denying it, but I think good investing is about exactly that. If it’s harder today, I’m going to go crazy and say the rewards will be bigger to doing it. I used to think being great at investing long-term was about genius. Genius is still good, but more and more I think it’s about doing something reasonable that makes sense, and then sticking to it with incredible fortitude through tough times.
RUHLE: But how do you do that? Think about who — what we’ve seen grow in the hedge fund community in the last few years. It’s these hedge fund platforms. It’s hedge funds that have vertical after vertical. And the minute you go outside your range, a secretary you’ve never seen before shows up with an empty box at your desk, saying get the hell out of here.
Cliff Asness: Yes.
RUHLE: Well that’s what the investment climate has turned into. How do you invest in a time like this, and how do you explain, well we’ve got to give more credit to these people? How?
Cliff Asness: You get fired by those people. You find other people that are out there. They invest with you, and then you do well. You try to stay away from these people as much as possible. The short-term is your enemy. I think what I call the short-term is sometimes years. I think people look at multiple years at times and infer too much.
So if we’re talking about quarters and months that’s crazy. I agree with that. But I do think my method — my message of optimism here is I think there are more investors, there are more institutions, there are more individuals through their — either on their own or through advisers who have a longer time horizon. The shift you’re talking about is real, but they are not the whole market.
SCHATZKER: Cliff, we’re going to have plenty of time over the course of this hour to beat up on hedge fund managers, but for the moment let’s talk about some of the macro managers who are paying geopolitical risk consultants all kinds of money, right, for advice that doesn’t seem to matter. If we go back to the chart that we looked at that Matt showed us with these terrorist incidents, the relentless, more or less relentless march upward of the market during times of geopolitical stress, it just leaves me wondering.
RUHLE: Why people like Cliff pay geopolitical analysts so much money?
Cliff Asness: I have never paid a geopolitical analyst, to my knowledge. It’s a big firm. I’m going to wake up and find out actually you gave one $7.00 12 years ago. Look, you’re talking to a disciplined systematic manager. You’re throwing me a hanging curve ball. I don’t believe that kind of stuff works very well.
I also have to live and work in Greenwich, Connecticut and my kids have to go to school there. So if I’m too nasty I’m not sure I can go home again. There are people who believe in it more. There are people who are more short-term. Some have good track record. Distinguishing that randomness versus skill is very hard. If you ask me my honest opinion that stuff is not very worthwhile to make money.
DAVID WESTIN, BLOOMBERG NEWS: So, Cliff, it makes sense to me, and I’ve heard from other people, you need to figure out a good plan, stay with the plan, don’t get thrown off your plan with little vagaries that come up sometimes. But at what point are there data that come and says I got to rethink the plan?
Cliff Asness: Well there are things, like I don’t think the global financial crisis was a just ignore it, stick with it. And even there you don’t sell all your stocks in a panic. But that was something that I don’t think could just say I’m not going to pay attention and ignore it. Most of the time you focus on why you’re doing what you’re doing, what the historical evidence is. And you stick with it.
I was not an author of this, but three guys from my firm wrote a paper on Warren Buffett’s return over time, 35, 40 years of returns. Of course they found