Cliff's Perspective

Latest Posts



    • Topic:

      Portfolio Management, Risk Management, Factor Investing

    Writing my post titled “2016 Was Not a Particularly Volatile Year” on realized risk/variability turned out to be even more fun than usual as I got a lot of great comments on it. Of course, some didn’t buy it. Some said things like “yeah, but you have to admit this or that was crazy,” whatever this or that was. Sometimes I agreed, sometimes I didn’t. We all have a different definition and standard for crazy! By far the most common comment was “ok, you just looked at the S&P 500, what about…?” I can’t look at ...

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    • Topic:

      Portfolio Management, Risk Management, Factor Investing

    Maybe it’s just me but a lot of end-of-year commentary about financial markets in 2016, implicitly and sometimes explicitly, makes it sound as if it was a crazy year. It wasn’t. In fact, it was amazingly normal. This is true of at least the S&P 500 (I’m not going to be more ambitious here) which is what I think many of these commentators are talking about.1,2

    Annualized daily volatility during 2016 came in at 13.1%. Based on rolling same-length periods going back to 1929 this falls at the 47th percentile.3 You say you don’t want to compare to ...

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    • Topic:

      Portfolio Management, Risk Management, Factor Investing

    There has already been much ink, and maybe even some blood, spilled debating the merits of “Active Share” for judging an investment fund. There was the original paper, a critique of that paper written by some of my colleagues, a reasonable (which doesn’t mean I agree with it) response to AQR’s piece, and even a seriously deranged1 response to my colleagues’ work (thankfully I’m known for a certain aplomb and even sangfroid in such tense situations and have helped calm everyone down). I don’t seek to re-open this debate but, ...

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    • 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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