How to invest in today’s expensive and risky markets? AQR Capital’s Cliff Asness, a rare combination of Great Investor and Financial Thought Leader shares his views and strategies. WEALTHTRACK #1501 broadcast on June 22, 2018.
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Financial Thought Leader Cliff Asness Sets The Quant And Hedge Fund Record Straight
To a big part of what we do right. Not all of what we do. This is ancient news from now this is the early 1990s. I'm dating myself but I wrote my dissertation on kind of the opposite of value the momentum strategy. I didn't say it should be done instead of value I said. It is a nice complement to it momentum. You know let me back up a value strategy tries to come up with some reasonable metric for value price to book price to cash flow price to sales. Then you can debate all kinds of how to make those measures better and we do that with the war the world gets very worked up about that and you go long or overweight depending on the investment mandate cheap low price and shorter or underweight expensive right. On average over the very long term the cheap tends to beat the expensive. Momentum is almost the exact opposite in spirit. It looks over the last six to 12 months. They're both price and and fundamental momentum strategies just the actual things like earnings and profitability getting better and Bahai's which doing well and sellswords doing poorly. One of these not the only two things in quantitative finance but they're kind of two of the biggies. They both work on average. You've heard me say it before but I try to be very accurate and cowardly in my use of the word work right. I mean it is a statistician a little more often than it doesn't work if you're carto three years three years this would be great right.
That is a typical number we would throw out if your car worked like that you'd fire your mechanic. But markets are harder than than than. I don't know if they're harder than building a car but it's hard to be reliably right. In markets two out of three it's three means that you're making money or you're doing better than the market in two out of three years. What's the definition of a it depends really on what a client asks us to do. Okay we do both kinds of portfolios we do portfolios that for a long time we've called Absolute Return portfolios that term sometimes means very low risk portfolios that's not how we mean it we just mean a return that's not correlated to the market. And imagine and again Value Momentum is an oversimplification but it's a useful one. Imagine that is your entire process. That's what you believe in. So you've identified stocks and this by the way extends to a lot more than stocks countries bond markets commodity markets where to be in a yield curve. They are all amenable in our view to some Value Momentum measures. But let's talk about stocks because that's I think the easiest language to to to discuss. You've identified stocks that are attractive on these measures that are unattractive. Client A has asked you to build something that's not correlated to markets and is allowing you to use some of the scarier things in finance. When I say scary I don't think they're that scary but the ability to shore still.
Own bonds for portfolio diversification
- Make sure they are high quality
- Avoid bond funds with lots of lower quality bonds
CHOOSE AN INVESTMENT APPROACH SUITABLE FOR YOU AND STICK WITH IT
Financial thought leader Cliff Asness and his fellow Ph.D.’s at money management firm AQR Capital Management have been recognized for their groundbreaking research on markets and investing. Asness and a former colleague, Aaron Brown recently found an investment connection in a seldom used but highly effective ice hockey strategy.