Cliff Asness Knows Less than He Thought

Discussion in 'Wall St. News' started by dealmaker, Jun 22, 2018.

  1. dealmaker



    Cliff Asness Knows Less than He Thought
    AQR’s own research has disproven the size factor and undermined long-term forecasting.

    • Leanna Orr
    June 21, 2018

    “It Ain’t What You Don’t Know That Gets You into Trouble.”

    “There isn’t a pure size effect,” Asness wrote. “In fact, there never was a size effect.”

    [II Deep Dive: Asness in Purgatory]

    Theoriginal studyobserving outperformance by stocks with small market capitalizations versus large ones — the size factor — was published in 1981. The findings helped earn its author Rolf Banz his PhD from the University of Chicago’s business school, an institution deeply ingrained in AQR’s intellectual lineage. Asness, among many other senior employees, is an alumnus.

    “Among other issues, the data used to discover it was flawed (though no fault of the author, that was the data back then) in a way that favored small stocks,” the AQR founder noted.

    More accurate modern datashow no additional premiumfor small stocks.

    TDFs Can Help Investors Wade Through Choppy Markets[/paste:font]
    “It’s likely a sobering thought to many that the Ur‑anomaly, the one that’s been used to practically reorganize the entire money management industry, just isn’t there,” he continued.

    AQR, according to Asness’s note, has never been a major believer in the small-cap premia, and thus the research presumably won’t mean a full-scale revamp of its factor-based products and investment models.

    Likewise for the recent evidence that standard long-term return forecasting is less certain than had been assumed.Another paperby AQR staff determined that long-horizon return regressions have effectively small sample sizes, and researchers have vastly under-corrected for this phenomenon, arriving at findings that seem more certain than they are.

    “We know less than we thought,” Asness wrote. “The empirical best guess (the point estimate) remains the same. In fact, I think it is a very healthy thing if we (not just AQR, but the field) continue to question all the old results not accepting anything as canon.”

    A third longtime feature of Asness’s professional life has also recently changed.

    AQR’s head of North American business developmentJeremy Getsonrelocated to Utah, he confirmed by phone. Getson is still with AQR, he said. But after 14 years with the firm, he will no longer be based out of AQR’s Greenwich, Connecticut offices.

    Getson helped popularize smart beta as a philosophy and product category, according to institutional allocators.

    “Jeremy did the road show on factor investing and alternative beta before most institutional investors really knew what they were,” Dominic Garcia, the chief investment officer for New Mexico’s pension fund,toldInstitutional Investorearlier this year. “AQR changed the way we invest, and I think Jeremy was the tip of the spear.”

    Back then, the size factor was probably still a thing.

    https://www.institutionalinvestor.c..._term=Cliff Asness Knows Less than He Thought
    trader99, jbusse and ajacobson like this.
  2. dealmaker


    Financial Thought Leader Cliff Asness Sets the Quant and Hedge Fund Record Straight

  3. patrickrooney

    patrickrooney Sponsor

    Great article. Thanks for sharing it.
    dealmaker likes this.
  4. trader99


  5. So, is the only take away from a trading/investment perspective that small caps do not outperform large or mid caps? Thanks.
  6. patrickrooney

    patrickrooney Sponsor

    Admit when you're wrong comes to mind as well.

  7. Makres sense. Thabk you.
  8. So I was just thinking about this. I always had the impression that, over the long haul, NASDAQ outperformed the S&P, which outperformed the DOW. Not hugely, but somewhat. And I always thought this was tied to size - NASDAQ had smaller companies on average than the S&P which has smaller companies on average than the DOW. That is, smaller stocks were a bit "riskier" than larger stocks, and returned a bit more on average to in essence compensate for this additional risk.

    Have my impressions been wrong all these years?