Cliff Asness Defines Alpha

Cliff Asness is one of the most important thinkers and money managers in the business today – but I must admit I found myself utterly confounded by his Barron’s interview this weekend. There were enough inherent contradictions and non-sequiturs in the discussion that I put the iPad down and scratched my head more than once as I read it.

I was especially confused about his take on the traditional 60-40 stocks and bonds portfolio. He basically says 60-40 won’t work very well going forward because of the expensiveness of both stocks and bonds right now relative to history but provides little evidence as to why or that his alternative (risk-based weightings and leverage) will fare any better.

But perhaps the most interesting portion of the discussion centered around how Cliff Asness thinks about alpha and what type of performance is acceptable to people paying fees on ’40 Act mutual funds…

One of the quick-and-dirty definitions of alpha is outperformance against a benchmark. How do you think about alpha?

It gets a little more subtle than that. As we see it, there are three ways to generate returns. To conceptualize alpha, we actually draw a little pyramid with a base, a middle, and a top. The base is passive markets. Now, we can fight about what the allocation should be for a 60-40 portfolio, but the base of the pyramid is markets. They go up more than they go down, and over the long term, there is a positive risk premium. The top of the pyramid is alpha, but that should be truly something very few, if anyone, can produce—something that’s kind of hand-crafted, a skill that’s unique, or at least relatively unique, to one person or a handful of people. That’s worth a lot.

By the way, it can apply to a quant, as well; it doesn’t have to be a stockpicker. If you find a factor that has a great story, great data, and that no one else is on to yet, that’s alpha. If you implement the big four better than someone else, that’s alpha. But the basic idea of tilting toward value isn’t alpha. The truly unique “we visit the company and ferret out things no one else knows” approach is still worth a high fee, but what I’m discussing is worth somewhere in between that fee and an index-fund fee. And the world is moving toward making that distinction, which is positive for investors.

Is Asness right?

Are investors willing (or able) to see past the S&P 500 or a blended benchmark of traditional asset markets to mentally justify the high cost of a fancy product? I don’t think so, but maybe he’s having different discussions than I am.

Investors want lower drawdowns in down-markets and higher-than-benchmark gains in rallies – often from the same strategy or product. Irrational? Yes, of course. But that’s the expectation, no matter how vociferously a manager talks down the chances of that being feasible.  I agree with Asness that this changing would be a positive for investors – I just don’t think it ever will change.


The Big Danger: Overreliance on Stocks (Barron’s)


What's been said:

Discussions found on the web
  1. EV EatVerts commented on Sep 22

    … [Trackback]

    […] Information on that Topic: […]

  2. cum se curata commented on Oct 30

    … [Trackback]

    […] Read More Information here to that Topic: […]

  3. Earn Fast Cash Now commented on Nov 03

    … [Trackback]

    […] Information on that Topic: […]

  4. chiem bao thay di chua commented on Nov 23

    … [Trackback]

    […] Information to that Topic: […]

  5. td easy web commented on Nov 26

    … [Trackback]

    […] Read More to that Topic: […]

  6. intelligent automation services commented on Nov 28

    … [Trackback]

    […] Read More on on that Topic: […]

  7. asian love doll 125cm heads commented on Dec 08

    … [Trackback]

    […] Find More on to that Topic: […]

  8. 5d diamond painting commented on Dec 29

    … [Trackback]

    […] Read More on that Topic: […]

  9. cheap wigs commented on Jan 19

    … [Trackback]

    […] Find More Info here on that Topic: […]

  10. Orsio b721+ manuals commented on Jan 19

    … [Trackback]

    […] Find More to that Topic: […]

  11. tangerine log-in commented on Jan 22

    … [Trackback]

    […] Read More here on that Topic: […]

  12. dumps with pin commented on Feb 06

    … [Trackback]

    […] Find More on that Topic: […]