Cliff's Perspective

Latest Posts



    • Topic:

      Factor Investing

    Some assert that once a strategy is “discovered” it can’t work anymore. Others, often implicitly, assume the future will look as wonderful as the past. Perhaps not surprisingly, we stake out a middle ground. We’re going to argue that certain well-known classic strategies that have worked over the long term will continue to work going forward, though perhaps not at the same level and with different risks than in the past.[1] We will focus on classic “factor”-type strategies.[2] Our favorites won’t shock anyone. They are things ...

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    • Topic:

      Data

    Data mining — “discovering” historical patterns that are driven by random, not real, relationships and assuming they’ll repeat — is a huge concern in many fields. My focus is, of course, on the field of investing, where those concerns are particularly present. That is true in academic and quantitative studies when great statistical power is brought to the effort, but it’s also a concern in the non-quant world (how many would want to imitate Warren Buffett if he had not been so successful and do we give too much weight to that ex post ...

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    • Topic:

      Risk Parity

    No, I don’t mean tactically. I like to think I’m bold, sometimes a bit too bold, but not crazy! We think both stocks and bonds are both quite expensive versus history and that this typically, though not always, leads to lower than normal long-term returns.[1] But valuation is a poor timing method. We are not writing articles, belying my title, about how risk parity[2] or for that matter traditional 60/40 investing is tactically attractive now.[3] The risk parity versus 60/40 argument has always been about strategic long‑term — not tactical short‑term — asset allocation ...

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    • Topic:

      Hedge Funds

    Well, today,[1] The New York Times has gotten in on Institutional Investor’s annual listing of the top hedge fund earners. The article is mentioned on the front page of the print edition and is a top article on the paper’s website. The reasons for this include standard gawking at the rich that has probably been going on since one person had a bigger mud hut than her neighbor, but also, as this is The New York Times, the scoring of certain political points (“these guys made all this money despite mediocre years!”).

    Unfortunately, this list, published for many years now, ...

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    • Topic:

      Market Efficiency

    In writing the foreword to a very good book by Antti Ilmanen (before he joined our firm) I mentioned that I had two options: I could kill Antti to prevent him giving so much good stuff away, or I could praise his book.  I chose to praise. Now another outstanding Nordic researcher (and AQR partner), Lasse Heje Pedersen, presents me with the same dilemma: His new book, Efficiently Inefficient (Princeton University Press), is fantastic — almost too good at laying out how successful professional asset managers think and act. Lasse is Danish, Antti is Finnish. ...

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    • Topic:

      Portfolio Management, Risk Management

    A buzzword in the investment community these days is active share, a specific way to measure how different a portfolio is from its benchmark. On its own, such a measure wouldn’t attract much attention; what’s gotten people excited is the claim that higher active share predicts higher excess returns.

    So does it? No, as we show in a new AQR white paper, “Deactivating Active Share.” That shouldn’t be too surprising. Just because a portfolio claims to have “high conviction” and thus looks a lot different than its benchmark ...

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    • Topic:

      Asset Allocation

    I have long been appreciative of those pioneers who have been instrumental in advancing our understanding of investing by conducting, and most importantly sharing, their research and insights. By taking the time to make their research and ideas accessible to a wider audience, they have given us all the opportunity to become better investors. Today, with the launch of “Words From the Wise” interview series, we continue to learn from industry leaders and benefit from their experiential wisdom.

    With this occasional interview series, we tap some of the greatest ...

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  1. February 13, 2015
    • Topic:

      Asset Allocation, Portfolio Management

    Conventional wisdom holds that sensible investors avoid leverage. This is unfortunate. Sadly, the valuable role of leverage, applied prudently and used to diversify, not simply amplify, is widely misunderstood. In an Institutional Investor article this week, I seek to address this misunderstanding with knowledge of how portfolio leverage can be prudently employed and why it can be beneficial in modest doses with proper concern for its dangers.

    Consider how investors often seek higher returns through more concentrated portfolios, say through greater equity exposure ...

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    • Topic:

      Style Investing

    Does size matter? Certainly in financial markets, many researchers have questioned whether it does. In a new paper, we resurrect the size premium and restore it to its proper place alongside such stalwarts as value and momentum in terms of its efficacy and robustness. After so many years of intensive research questioning the efficacy of the size effect, that it can be emphatically revived may seem a bit far-fetched. So, how can it be that size does indeed still matter? I’ll get to that, but first a little background.

    The idea of earning a premium for investing in ...

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    • Topic:

      Corporate Governance, Market Efficiency

    The idea that corporate management should focus on maximizing shareholder value is under attack, often in hyperbolic terms, with this idea blamed for great and varied harm (e.g., underinvestment, inefficiency, inequality and the failure of people to appreciate the film Ishtar). Recently, James Montier of the esteemed, including by me, money manager Grantham, Mayo, Van Otterloo & Co., voicing the views of many, wrote a piece calling it “The World’s Dumbest Idea.”[1] In addition, attacks have appeared in The New York Times and in The Wall Street ...

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