Cliff Asness: Pure Alpha is Still Worth It

One of the highlights of yesterday’s Bloomberg Markets 50 Summit (my notes here) was, without a doubt, the conversation between alternatives king Cliff Asness (AQR) and Lawrence M. Schloss, who is the Chief Investment Officer for the City of New York’s $145 billion pension portfolio.

Cliff Asness is a quantitative analyst and money manager, his firm AQR does everything from hedge fund-structure investing to ’40 Act mutual fund advisory. Not every strategy AQR employs will be the right one for a given environment and most are not expected to outperform a bull market in the S&P 500. Much of what quantitative firms seek to deliver are risk-adjusted returns, and, from that standpoint, the $70 billion AQR has clearly been successful.

When the conversation between Asness and Schloss turned to the cost of investing and whether or not alpha or risk-adjusted returns were really worth paying fees for, things got interesting.

Asness explained how, in this day and age, the classic hedge fund strategies that have always worked will continue to work – although with a more crowded field of practitioners they will probably be less profitable than they had been historically. He’s referring to styles like long/short equity, merger arb, convertible arb, etc. These types of strategies, he notes, probably are not deserving of the standard 2-and-20 anymore, given how easy they are to access and how common they’ve become.

But Asness believes that more sophisticated or proprietary strategies are still worth paying up for, noting that when you can find true, pure alpha (returns above a benchmark, uncorrelated with the market’s returns), it’s probably still a good bargain. That said, he believes that beta (raw market returns) has been creeping into the aggregate returns of the hedge fund complex for years now and actual alpha has become really scarce.

Lawrence Schloss weighed in on the cost of alpha with both a pro and con argument. His initial comment, was a rhetorical question: “If I can get beta for three bips [basis points], who cares about alpha? Why do I need it?”

This was followed up with a more conciliatory take, “Let’s be clear: Costs matter. But I only care about the net returns, only the net matters. if you give me seven [meaning 7 percent], why do I care if it was ten first before you paid yourself. You gave me seven!”

Cliff’s witty, devil’s advocate retort was “But what if it could’ve been eight?”

To which Lawrence deadpanned, “Then I negotiated a pretty bad deal for myself.”

I think the point is that the value of active management and alpha is still very much in the eye of the beholder. Schloss is running $145 billion and, with a portion of those funds, he’s thrilled to have non-correlated alpha being generated by managers like Cliff, so long as they are a part of a larger portfolio that is cost-conscious in the aggregate and even if they don’t keep up with the broader market in a rally.

It’s when you’re overpaying performance and incentive fees for disguised beta that the costs become harder to justify.

 

This content, which contains security-related opinions and/or information, is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment.

The commentary in this “post” (including any related blog, podcasts, videos, and social media) reflects the personal opinions, viewpoints, and analyses of the Ritholtz Wealth Management employees providing such comments, and should not be regarded the views of Ritholtz Wealth Management LLC. or its respective affiliates or as a description of advisory services provided by Ritholtz Wealth Management or performance returns of any Ritholtz Wealth Management Investments client.

References to any securities or digital assets, or performance data, are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others.

Wealthcast Media, an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. Investments in securities involve the risk of loss. For additional advertisement disclaimers see here: https://www.ritholtzwealth.com/advertising-disclaimers

Please see disclosures here.

What's been said:

Discussions found on the web
  1. click here commented on Sep 30

    … [Trackback]

    […] Read More on on that Topic: thereformedbroker.com/2013/09/25/cliff-asness-pure-alpha-is-still-worth-it/ […]

  2. Instagram Marketing commented on Oct 10

    … [Trackback]

    […] Find More on to that Topic: thereformedbroker.com/2013/09/25/cliff-asness-pure-alpha-is-still-worth-it/ […]

  3. buy cc commented on Oct 31

    … [Trackback]

    […] Read More Information here on that Topic: thereformedbroker.com/2013/09/25/cliff-asness-pure-alpha-is-still-worth-it/ […]

  4. cheap wigs commented on Dec 17

    … [Trackback]

    […] Information to that Topic: thereformedbroker.com/2013/09/25/cliff-asness-pure-alpha-is-still-worth-it/ […]

  5. replica watches commented on Dec 21

    … [Trackback]

    […] Info to that Topic: thereformedbroker.com/2013/09/25/cliff-asness-pure-alpha-is-still-worth-it/ […]

  6. printed cornhole boards commented on Dec 30

    … [Trackback]

    […] Find More Information here on that Topic: thereformedbroker.com/2013/09/25/cliff-asness-pure-alpha-is-still-worth-it/ […]

  7. Software testing company commented on Jan 11

    … [Trackback]

    […] Read More Info here on that Topic: thereformedbroker.com/2013/09/25/cliff-asness-pure-alpha-is-still-worth-it/ […]

  8. buy arimidex commented on Jan 18

    … [Trackback]

    […] Read More Info here to that Topic: thereformedbroker.com/2013/09/25/cliff-asness-pure-alpha-is-still-worth-it/ […]