Cliff's Perspective

Latest Posts



  1. February 05, 2016
    • Topic:

      Momentum Investing

    The long-term success of the momentum factor seems to be a challenge to many observers. People say things like “momentum only works among small stocks” or “momentum only works for going short, not long.” These comments, which appear to be aimed at casting doubt on the implementability of momentum, seem to be spoken about more than written. There’s a reason for that. When you run the numbers, these statements are just not close to true. We’ve disproven a whole gaggle of them here. But, like many misperceptions, once in the zeitgeist they ...

    More


    • Topic:

      Equities

    One common story making the rounds about stock market performance in 2015 is that it was very “narrow.” In particular that it was driven by the “FANG” stocks (Facebook, Amazon, Netflix and Google). This is sometimes mentioned simply as an interesting observation. But other times in exasperation. As in, “How can active management work in such a ‘narrow’ environment?”  As in, “Sure, the capitalization weighted indices were flattish but it was so ‘narrow’ that the average stock was down and therefore most ...

    More


  2. December 03, 2015
    • Topic:

      Factor Investing

    In their recent white paper Reeling in Small-Cap Alpha, Kalesnik and Beck make the correct, if well-known, observation that the prominent factors in modern systematic investing (e.g., value, momentum, quality) are more effective with small-cap stocks than within large-cap. Furthermore, they show, as is also well-known, that the size effect itself is a weak sibling to these other biggies. While they are exploring a well-trodden path, at least none of this is wrong (there are some exceptions however — for instance, Israel and Moskowitz show that momentum delivers ...

    More


    • Topic:

      Risk Parity

    I’ve written before about the somewhat unhinged attacks on risk parity for having caused the market’s August sell-off. Frankly, if the goal were to attack risk parity, the critics made a silly choice to go all tin-foil-hat instead of just doing what people usually do — attack recent performance. They’d have to attack relative performance (versus, say, the most common benchmark of 60/40 U.S. equities/bonds) because absolute performance hasn’t been as big of an issue. But that shouldn’t slow down a dedicated critic. So, this note addresses ...

    More


    • Topic:

      Portfolio Management

    The Department of Labor’s Fiduciary Rule, which is applicable to retirement plans subject to ERISA such as 401(k) plans and to certain other retirement plans such as IRAs, is set to go into effect in April 2017. What the rule does is extend a fiduciary duty or standard to a broad set of investment advisors (many, particularly at broker-dealers, who were previously exempt) who provide recommendations to such plans. A "fiduciary duty” is the highest standard of care recognized in American law. Among other things it means that you must act solely in the best ...

    More


    • Topic:

      Style Investing

    I recently sat down for an interview with the economist Tyler Cowen, a professor at George Mason University and co-author, with Alex Tabarrok, of the popular economics blog Marginal Revolution. Our conversation, at GMU’s Mercatus Center, covers a lot on the very basics we believe in (e.g., value and momentum) and (apologies in advance if you’re very focused on only quantitative finance) a lot of other topics. It was a ton of fun for me to do. I hope it’s fun for you to watch.

    A full transcript of the interview is available here.

    More


  3. November 11, 2015
    • Topic:

      Portfolio Trading, Style Investing

    Value (or contrarian) investing and momentum (or trend) investing have long been core to what we do and, we believe, are the strongest empirical regularities in finance. In the latest issue of Institutional Investor, Antti Ilmanen, Thom Maloney and I apply these ideas to the age old task of market timing.

    Market timing has long been regarded by many as an investing sin. We find that, consistent with the gigantic amount of evidence across a diverse set of markets and asset classes, value and momentum have something to add in timing, too. But, consistent with the intuition ...

    More


  4. October 27, 2015
    • Topic:

      Behavioral Finance, Portfolio Management, Global Macro, Trading

    This issue comes up often, but recently I’ve seen more than the usual amount of “we forecast X, so we’re betting on Y” type stuff where X and Y are different events. The most common, but certainly not the only, example I’ve seen of such a two-step bet is having a strong currency view with a recommendation to buy, or sell, some specific companies that you hope will benefit, or get hurt, if your currency forecast comes true instead of directly buying or selling the currency.

    Another example might be having a view that inflation and interest ...

    More


    • Topic:

      Risk Parity

    Following August equity market volatility, commentators have been lining up to blame risk parity as a driving force behind that volatility. As I’ve said before: I can’t define short-term silliness, but like Justice Stewart I can identify short-term silliness when I see it. This recent rush to use risk parity as a pin cushion is just another case of such silliness.

    Some colleagues who lead our risk parity strategies here at AQR explain. Why isn't risk parity the cause? Well, we believe risk parity simply isn’t big enough to generate the level of ...

    More


    • Topic:

      Short-Termism

    There is just way too much focus on short-term performance. The media write about it constantly, and investor flows in aggregate (not everyone!) seem to follow it too much. We certainly enjoy these stories and flows a lot more when they are in our direction (not a bad picture either, considering the source material), and certainly believe the recent inflows highlighted are a good long-term allocation (that's mighty big of us, no!?). But we remind everyone that these decisions should be occasional, based on long-term assessments (and even if based on a tactical view, last ...

    More