For me, a good book is one that speaks to something important and that causes me to think differently and more clearly about the chosen topic. My AQR colleague Lasse Pedersen has written just such a book, Efficiently Inefficient: How Smart Money Invests and Market Prices Are Determined. (Full disclosure: he extols me as one of many, along with our competitors.) From now on, there are two kinds of investors: the efficiently inefficient ones and the merely inefficient ones who didn’t read this book.
If you’re still hawking the story that the original results of Fama and French, Jegadeesh and Titman, Lakonishok, Vishny and Shleifer — and even yours truly and others — were the result of data mining, you have been completely defeated on the field of financial battle, and you must stop.
The risk parity-versus-60/40 argument has always been about strategic long term — not tactical short term — asset allocation. Here I argue that, when viewed strategically, the empirical work on risk parity, including some of our own, understates its potential advantages. Moreover, all you need is basic finance theory to see it.
CalPERS made big news today announcing it will end its investments in hedge funds. AQR has long researched and commented on the hedge fund industry and here we reference that body of work to put CalPERS's decision into context.
In its normal form the small firm effect is, on a host of dimensions, weak to possibly nonexistent. Once adjusted for quality exposure it is real and spectacular.
Financial theory has taken a lot of abuse recently, specifically some of the basic tenets of modern portfolio theory. A fair chunk of the abuse comes from our industry’s collective tendency to judge ideas over relatively short periods. Thus, it’s important to occasionally step back and note that when examined properly, the very basics hold up better than many think or sometimes casually assert.