Cliff's Perspective

Latest Posts



    • Topic:

      Hedge Funds

    After many years (decades) of being one of the very early hedge fund critics I've recently (tepidly) defended hedge funds from overwrought attacks that wrongly compare them to a beta of 1.0 in a bull market and, as usual, act as if we learn more from a few years than we really do. In these tepid defenses I share my own concerns that this tepidity (if not a word it should be) is intentional and permanent.[1] That is, mine is a defense against a near legion of badly targeted criticism, but not close to an “all clear” sign that hedge funds don’t merit any ...

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    • Topic:

      Portfolio Management

    I admit that there is no type of result I enjoy encountering more than one that seems so counterintuitive, so against accepted wisdom, so surprising that I didn’t see it coming at all. Even more enjoyable is the rare occasion when that epiphany is my own. Alas, my subject today only fulfills the first criterion, as sadly, this particular insight wasn’t mine…

    The related topics of, “How much active management is necessary?” (and, conversely, “How much indexing would start to be a problem for market efficiency in both pricing accuracy ...

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  1. September 02, 2016
    • Topic:

      Market Efficiency, Index Investing, Factor Investing

    The recent Sanford Bernstein research note calling indexing “worse than Marxism,” created quite the kerfuffle. In my Bloomberg op-ed article, I discuss how the Bernstein note, while perhaps kick-starting some valuable discussions in the world of finance, missed, or at least minimized, something much more important — free riding on price signals is not a bug of Capitalism to be exploited by “greedy red indexers,” but instead may be the most important feature of Capitalism.

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    • Topic:

      Risk Management

    My colleagues have written a response to Thomas Hoenig’s recent WSJ op-ed “Why ‘Risk-Based’ Capital Is Far Too Risky.” Hoenig’s recommended approach to managing leverage risk using a “simple” notional leverage limit reminds us of Einstein’s famous purported comment to make things as simple as possible, but not simpler. The authors believe that Hoenig’s approach fails to meet the Einstein test. My colleagues explain why in their letter.

    As always, I hope that you will share your feedback.

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  2. June 22, 2016
    • Topic:

      Factor Investing, Portfolio Trading, Style Investing

    Here is a link to my latest on the ongoing issue of style timing and the very legitimacy of some of the factor strategies. To whet your appetite, below is the abstract of the paper:

    Arnott, Beck, Kalesnik, and West (2016) (ABKW) study smart beta or factor-based strategies and come to the following conclusions: (1) Aside from value, most popular factor strategies currently look expensive. (2) These expensive factor valuations portend lower future returns and a strong possibility of a future “factor crash” in which they go “horribly wrong.” And (3) ...

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    • Topic:

      Hedge Funds

    After my last piece on hedge funds I’ve gotten a lot of questions that often come down to the issue of “beta” versus “correlation” with the market and, more generally, about “alpha.”  I thought I’d share a version of my typical response.

    First, in response to many otherwise good questions that I think confuse correlation with beta, they are not the same. As an example — for a fund that is 10% long stocks and 90% cash, the beta of the fund is 0.1, but the correlation to stocks is 1.0 as stocks drive all the ...

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    • Topic:

      Hedge Funds

    Miles Johnson of the FT takes strong issue with an article I didn’t write but, rather, one he thinks someone like me would write (I’m sorry if that’s hard to follow but it’s Miles’s fault).

    I wrote a fairly narrow piece pointing out that articles marveling at the 2015 compensation of the top 25 hedge fund managers (e.g., here or here) are about wealth when they purport to be about income. That’s basically it.  Not a statement that wealth wasn’t important.  Not a defense of this wealth.  Ayn Rand didn’t leave ...

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  3. May 12, 2016
    • Topic:

      Hedge Funds

    It seems that all we read today about hedge funds is about how they, as a group, are failing and investors are heading for the exits. In this Bloomberg article, I discuss how the current dialogue is an overreaction, even though many criticisms are valid, and is based on a false comparison. We’ve long been saying that, as a whole, most hedge funds are too correlated with equity markets and too expensive given that too much of their return comes simply from equity markets rising, something that isn’t bad but is available for nearly no fee. I haven’t ...

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    • Topic:

      Behavioral Finance

    I’m taking a break from the factor timing wars to demonstrate something really important – that hockey’s New York Rangers not winning the Stanley Cup from 1940-1994 was a greater achievement (“achievement” being, you know, really bad in this context) than baseball’s Chicago Cubs not winning the World Series from 1908-2015. Besides a break, it’s also a nice math/probability reminder about looking at everything, not just headline numbers that seem applicable to investing. Furthermore, it’s apropos now as my New York Rangers ...

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    • Topic:

      Factor Investing, Portfolio Trading, Style Investing

    It seems that now everyone wants to time factors. Indeed, we’d love to as well if we thought it was a very useful endeavor. But, although tempting, in an editorial piece for a special upcoming Journal of Portfolio Management issue focused on quantitative investing — written at the kind request of long-time editor, Frank Fabozzi — I argue that this tempting siren song should be resisted, even if I know some will be disappointed with this view.

    In looking at the simple “value” of the factors themselves, I find such timing strategies to be ...

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