Cliff Asness: evaluation

Transcript context

…I will try to separate those two. It’s hard sometimes. I think if you have to go buy one of every hedge fund that will take your money, which is a subset of hedge funds. Some of them are closed. You’d probably be better off figuring out what their average exposure to the stock market is and go buying an index fund. I live in Greenwich, Connecticut. In some parts of the world, if you said, “my daddy runs a hedge fund,” I’d say, “what’s a hedge fund?” In Greenwich, Connecticut, the kids say, “what kind of hedge fund is your daddy running? Is he event arbitrage? Trend following? What does dad do?” I am going to be persona non grata, but I think hedge funds — and there is a lot of complexity to this answer. They are a universe of smart people, they are doing some good strategies, some I mentioned to you, already. They seem to have grasped the momentum strategy, not so much value oddly enough. But they seem to definitely incorporate the momentum strategy. There are so-called arbitrage strategies — they don’t use the word like academics. Academics or almost academics like me, use it to mean riskless profits. They mean, a trade that has reliably worked over time where they go long and short, fairly similar things, they are clearly not riskless. But, something like a merger, A is buying B, if the deal closes, it’s going to go to here. A is going to fall, B is going to rise. The day it is announced, it only goes to here, because there is some chance this deal does not happen, antitrust, the market, shareholder activism, somebody else. What the merger arbitrageur — and my finest achievement today is saying that word in front of you, that’s a hard word to say — buys B, and sells A, and if it happens, they make a little money, and if it fails, they lose a lot of money. I am dying to do this, I have not done it yet, I have talked about it for two years, I am about ready to try it. I want to ask one of my two older kids, they are a set of twins, they are 12 years old, “Does this sound like a good idea to you?” I’d have to hold their attention throughout this whole thing. There’s about a 98 percent chance they say, “No. That sounds like a terrible idea to me, you can lose a lot, you can make a little. Who wants to do that?” I’d be the proudest pop on Earth if either one of them kind of paused and said, “how often do both of those two things happen, Dad?” Because, that’s the proper question. It turns out, if you do this rather with zero skill, you do every merger that ever comes along. Maybe you can do better, maybe not, but you just do this every time, you’ve made a lot of money over time. You get killed occasionally, you are basically selling insurance, when the deals don’t happen, you lose a lot of money. Hedge funds have figured that out, there are lot of other things they figured out like this, that’s the good part. re basically selling insurance, when the deals don’t happen, you lose a lot of money. Hedge funds have figured that out, there are lot of other things they figured out like this, that’s the good part. The bad part is they do not, as a group (and keep in mind, this is self-serving, but we run things people would call hedge funds, not all of our business by any means, we think we are not doing this, we don’t think we are the only ones giving clients the fair deal, I am talking about the industry as a whole) doesn’t hedge enough. I know that sounds stupid given the name, but if anyone likes geek numbers like correlation, for the last seven years, an index of hedge funds has been about 0.8 correlated with the S&P 500. That means if you tell me what happened in the S&P 500, I got a pretty good idea what’s happening in the hedge funds. The word “hedging “almost by definition refers to removing that risk. Trying to create returns that go up on average but at different times than stocks. You can get that again from Mr. Bogle for about 11 basis points, near a tenth of a percent. They don’t hedge enough and they charge a lot. I will never — you have a shot, Tyler, I don’t have a shot — I will never get an economic law named after me. I gave that up when I went to try to make money. If I got one, I’d want it to be: There’s no investment process so good that there’s not a fee high enough that can’t make it bad.* [laughter] I do think hedge funds don’t hedge away a lot of the risk in return. You can get much cheaper elsewhere and then simply — on average, broad strokes, I’m insulting some people unfairly including myself — but they charge too much. Here’s a historical question, but it can be about recent history. Who is the individual who has done the most to promote liberty who is undervalued in this regard? [pause]…

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