Cliff's Perspective

Latest Posts



    • Topic:

      Factor Models

    First, I must issue a disclaimer. This is for wonks already immersed in the factor literature. There's lots of inside baseball, assumed terminology, etc., in this one. I explain what I’m doing along the way, but rarely from scratch. If this stuff is brand new to you and you still understand it all you are way smarter than me (you are allowed to find that to be faint praise). There’s nothing more mathematical here than a regression model but there is lots of shop talk. So, if "factor wonk" doesn't describe you, you probably have friends and a social life, so ...

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    • Topic:

      Asset Allocation, Market Efficiency

    (Corrected December 12, 2014)

    Financial theory has taken a lot of abuse recently, specifically some of the basic tenets of modern portfolio theory. Some of it we at AQR aid and abet (just two examples: markets are good but not perfect, and risk balancing beats capitalization weighting). But a fair chunk of the abuse comes from our industry’s collective tendency to judge ideas over relatively short periods, even if — or precisely because — short periods often feel like long periods. Thus, it’s important to occasionally step back and note that when examined properly, the ...

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    • Topic:

      Research, Data

    For years I've been an admirer of, and thankful for, those who have created and publicly shared the databases that allow us to do our research far easier and better. Today AQR attempts to join them in making such a contribution. 

    When you create a database you do something qualitatively different from writing a paper that makes a specific point (a feat not to be sneezed at either!). You allow others to expand upon your work. Going further, you openly risk others finding the flaw in your work, confident that if that occurs it's to the betterment of us all. Put simply, ...

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    • Topic:

      Momentum Investing

    Even the guys I admire pick on momentum!

    My quick thoughts to John Cochrane's recent post are included in the comments section of his blog.

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    • Topic:

      Alternative Investing

    Recently I used the CalPERS decision to eliminate their hedge fund program as a good time to review some of AQR’s long standing comments on the industry — ultimately being sympathetic to CalPERS’ decision. I included the self-serving caveat that I still believe hedge funds provide exposure to many good strategies that deserve to be in a portfolio, but I argued that they should be more fully hedged, more transparent, and delivered at a lower fee. I included in that entry one mild counter-point partially defending hedge funds. Namely, that some pick ...

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  1. September 24, 2014
    • Topic:

      Risk Parity

    The role of leverage in risk parity is often misunderstood. All else equal, more leverage increases both risk and expected return. But all else is not equal here. The willingness to use modest leverage allows a risk parity investor to build a more diversified, more balanced, higher-return-for-the-risk-taken portfolio. In our view, this more than compensates risk parity investors for the necessity of employing some leverage. Let’s first step back and consider the basics.

    We believe that to be called a risk parity strategy there are two crucial ingredients:

    1. Asset ...
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    • Topic:

      Alternative Investing, Hedge Funds

    Everyone seems to be talking today about the recent decision by CalPERS to liquidate its hedge fund portfolio. So it seems like a good time to reiterate some of my (and my AQR colleagues’) general thoughts on hedge funds. Since at least 2000, with the paper “Do Hedge Funds Hedge?”, we’ve been arguing that, as a whole, hedge funds are too correlated to equity markets (too net long). Clearly, this correlation reduces their effectiveness as portfolio diversifiers. Furthermore, in a very related observation, we believe most hedge funds are too expensive ...

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    • Topic:

      Style Investing

    Though some confusion continues regarding the subject, the term “smart beta” (including “Fundamental Indexing”) is just a new way to describe some well-known and well-tested investment ideas. An article I wrote for Institutional Investor nearly eight years ago made this clear, as did a presentation I delivered at the Q Group in 2007.

    However, we work in a business where it’s not uncommon to see good ideas repackaged as something new and that is not always a bad thing at all. Smart beta is the latest example. So John Liew and I have written a new article explaining that ...

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  2. September 10, 2014
    • Topic:

      Portfolio Management, Research

    I have some firm opinions, but I don’t really know exactly what this running commentary will become. Like most new things of this nature, it will evolve. There are some things I do strongly expect. It will be about investing, with a non-shocking emphasis on quantitative investing. It may entail some macroeconomics, but little to no politics, unless it bears directly on the ability to create returns for clients (e.g., a hypothetical new law restricting some type of strategy). It’s also a place I might simply point to new papers or other news related to us, or ...

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