Factor/Style Investing
May 9, 2022
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Cliff Asness
Over these additional three months, value’s returns, as we measure them, have continued apace. Since February, the value spread has fallen slightly, though it remains near its tech bubble peak, at around a 95th percentile. Reminder — a massive valuation dislocation says very little about the timing of when it falls back to earth. But it’s nice to see it start and still leave the spread incredibly high.
Alternative Investing
April 4, 2022
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Cliff Asness
My colleague and former classmate Antti Ilmanen is at it again with his second book, Investing Amid Low Expected Returns. Very rarely does a sequel stand up to the original (see Jaws II), but that's certainly not the case here!
ESG Investing
February 23, 2022
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Cliff Asness
Man Group recently wrote an op-ed titled “Short-selling does not count as a carbon offset.” Of course we agree it doesn’t. But the headline is quite misleading if taken to mean shorting has no role in the fight to reduce carbon emissions. Shorting does exactly what it’s supposed to do – raise the cost of capital to the emitters, even more so than divestment.
Factor/Style Investing
February 4, 2022
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Cliff Asness
Over these past two months, value’s returns, as we measure them, have been incredibly strong. This has killed the value spread. That is, it’s about as high as it was in the tech bubble. Just not as high as a few months ago. Yes, “killed” was sarcasm.
Value
December 16, 2021
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Cliff Asness
They say a picture is worth 1000 words. I’m embracing the concept in this post, which is just a single graph presenting the value spread constructed using the methodology that most closely reflects how we actually view value at AQR. Spoiler alert: the spread continued to explode higher in 2021. Despite this, we still made some money on value this year, which makes us very excited for 2022 and beyond. Also, if we’re wrong, I think I can make an NFT of this graph and really cash in.
ESG Investing
September 7, 2021
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Cliff Asness
It would be an understatement to say there is confusion in the industry about the use of shorting in an ESG context. When it comes to calculating a portfolio’s ESG score, we have heard arguments ranging from "ignore the shorts” to “net them against longs,” and, my favorite as it’s creatively insane, “pretend the shorts are actually longs.” This note explains why it is critical that shorts be properly accounted for, so that investors can use shorting to reduce carbon exposure, to get to net zero or to achieve other ESG goals.
Value
August 30, 2021
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Cliff Asness
By far the most popular question we get from value skeptics is “are the fundamental prospects for value stocks unusually poor today, justifying their low valuations versus expensive stocks?” Well, we now have an answer that doesn’t require a four-hour time commitment nor a PhD.
Factor/Style Investing
March 24, 2021
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Cliff Asness
Factor investing has long faced criticisms of data mining, and more recently faced another criticism – some backtests might never have been right to begin with. A growing body of mostly well-done papers examine these issues, generally concluding that factors have been disappointing since their “discovery.” We’ve long addressed these concerns through robust out-of-sample evidence and a compelling theory for why a factor should work. What we’ve lacked, until now, is a formal test. My colleagues’ new paper tests brilliantly, what we have argued, largely anecdotally, for years. Their results are rather startlingly (even to me) positive for the field in general.
Value
March 4, 2021
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Cliff Asness
Everyone knows the value strategy has been a grave disappointment out-of-sample since, say, 1990, based on realized returns. However, odd as it might sound, the realized average return on a strategy is not necessarily the best estimate of its true long-term expected return. In fact, the right estimate of the true long-term expected return of the value strategy is considerably higher than many might think if they were to just look at simple past returns – especially right now. Why? I explain it in this note (spoiler: it has to do with changes in valuation).
Tax Aware
January 15, 2021
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Cliff Asness
Over the last few years, we’ve built a considerable effort in tax-optimized investing. Admittedly, this was a little bit of a “if we build it, they will come” venture, given many taxable investors seem to ignore after-tax returns. Thus, it is gratifying to see my AQR colleagues win the Top Graham and Dodd Award for their research on tax optimization, a topic that I’ve long thought deserved a much more prominent place in asset management.