Has the stock market become less efficient?

Today, Rusty and Robyn are joined by Cliff Asness, Founder,  Managing Principal and Chief Investment Officer at AQR Capital Management. He is an active researcher and has authored articles on a variety of financial topics for many publications, including The Journal of Portfolio Management, Financial Analysts Journal, The Journal of Finance and The Journal of Financial Economics. He has received five Bernstein Fabozzi/Jacobs Levy Awards from The Journal of Portfolio Management, in 2002, 2004, 2005, 2014 and 2015. Financial Analysts Journal has twice awarded him the Graham and Dodd Award for the year’s best paper, as well as a Graham and Dodd Excellence Award, the award for the best perspectives piece, and the Graham and Dodd Readers’ Choice Award. He has won the second prize of the Fama/DFA Prize for Capital Markets and Asset Pricing in the 2020 Journal of Financial Economics. In 2006, CFA Institute presented Cliff with the James R. Vertin Award, which is periodically given to individuals who have produced a body of research notable for its relevance and enduring value to investment professionals. Prior to co-founding AQR Capital Management, he was a Managing Director and Director of Quantitative Research for the Asset Management Division of Goldman, Sachs & Co. He is on the ambassador board of The Journal of Portfolio Management, where he is a frequent author. Cliff is also a board member of the American Enterprise Institute and Commentary Magazine. Cliff received a B.S. in economics from the Wharton School and a B.S. in engineering from the Moore School of Electrical Engineering at the University of Pennsylvania, graduating summa cum laude in both. He received an M.B.A. with high honors and a Ph.D. in finance from the University of Chicago, where he was Eugene Fama’s student and teaching assistant for two years (so he still feels guilty when trying to beat the market).

Key Takeaways

• [04:17] - Cliff’s professional background and more on his current role at AQR Capital Management.
• [08:00] - Why does Cliff think that the stock market has become less efficient, over the course of his career, and how does he define medium term horizons?
• [25:21] - Why is it important for markets to be efficient and what does all this mean for investors moving forward?
• [30:47] - Why does Cliff argue that high-volatility alternatives are beneficial, especially when traditional assets seem safer?
• [42:20] - How should investors be thinking about including high-volatility alternatives into their portfolios? Are there specific guidelines for balancing these with traditional assets to achieve optimal diversification?
• [52:50] - Investors are often reluctant to embrace high-volatility strategies, due to psychological biases. How can investors overcome these biases and what role can Behavioral Finance play in educating clients about these opportunities?
• [59:21] - How has the landscape of quantitative investing evolved over the past decade and what does Cliff think are the biggest challenges and opportunities quants face today?
• [67:05] - What are Cliff’s thoughts on value investing’s long-term prospects and is the value premium still as robust as it once was?
• [73:41] - How does Cliff, personally, maintain his discipline in this industry? Is it just a matter of grounding himself in the data and the history?
• [83:27] - From Cliff’s experience as a co-founder of AQR, what are some of the most important lessons that he’s learned from building and managing a global investment firm? Also, how has AQR adapted over the years to market changes and client needs?
• [87:16] - What is currently Cliff’s favorite investment idea?

Quote

“The paper starts out pointing out that technological advancements don’t necessarily lead to more efficiency. I think we might naturally assume that they do. Most technological advancements – the availability of data very quickly, the ability to trade very quickly, a lot of them are about speed [and] are not about getting more accurate answers. You know, I don’t think that there’s a lot of argument that the internet and social media and being able to trade on your phone, actually makes us process information better. It just means that we get it very quickly and we drink from a fire hose.” ~ Cliff Asness

Links

• Cliff Asness on LinkedIn
• AQR Capital Management
• “One Day More” by Les Miserables Original London Cast

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