(Pictured: Cliff Asness)
by Greg Bright
The people who run AQR Capital Management are not the types who let sleeping dogs lay. They are happy, even, to broach confronting subjects at their celebratory 10th anniversary Australian seminar, held in Sydney last week.
For the uninitiated, Michael Lewis is the celebrated American writer of various finance-oriented best sellers, including his latest, ‘Flash Boys’, which tears strips off some behaviours at Goldman Sachs, including high-speed trading, in and around the GFC. And several of the founders of AQR, an equally celebrated US-based hedge fund firm, were partners at Goldmans before they formed AQR in 1998.
It became a running gag at the half-day seminar at Sydney’s Westin Hotel last Thursday, egged on by an enthusiastic audience of about 150 investors and advisors, that while the event was not sponsored by Goldman, the speakers were prepared to give their views on the Wall Street firm and whatever else was thrown their way. The seminar marked the 10th anniversary of AQR establishing a presence in Australia, which is its second-largest market outside of North America.
Cliff Asness, for instance, delivering the final address on the important subject of the efficiency, or otherwise, of markets, took time out in his preamble to have a go at the sell-side of the broking industry, in general – not just Goldmans.
“There’s a bit of the Stockholm Syndrome about the sell-side,” he said, referring to the psychological phenomenon whereby victims in hostage situations often identify with their captors, mistaking lack of abuse for kindness. One presumes Wall Street represents the captors and their clients the captives in his analogy. But maybe not.
Asness, AQR managing director and founding principal, said that Goldmans was a “different place” back then. It was clearer nowadays that very unethical firms did not survive. However, he said: “Saying ‘we screw our clients but only up until the point when we might go to prison’ is not a very ethical mission statement.”
He also observed that increased regulation did not necessarily reduce unethical behavior. “More regulation seems to end up with the sell-side making even more money by coming up with ways to help you deal with that regulation.”
David Kabiller, a founding principal who was also from Goldmans, told the seminar that differentiating factors at AQR, which he perceived at the time of the firm’s inception, included a passion and curiosity to understand how markets work, a willingness and desire to challenge convention and a desire to educate themselves {his partners and himself] as well as others.
He suggested that, while other people could do similar analyses, it was his founding colleagues at AQR who had the values to make for a sustainably successful firm.
The three ex-Goldmans presenters at the seminar, including Mike Mendelson (see separate report), agreed that Goldmans did no worse in the run-up to the GFC than other Wall Street firms. And did not make anywhere near as much money out of strategies such as high-frequency trading as has been claimed.
Asness’s main presentation at the seminar involved a discussion of the interesting dichotomy presented by two of this year’s Nobel Prizes for economic sciences, which went to theoretical opposites Robert Shiller and Eugene Fama. Shiller is a renowned critic of the efficient market hypothesis and Fama a renowned supporter. Asness’s and AQR’s view is about half-way between the two. Asness and another fellow AQR ex-Goldmans co-founder, John Liew, wrote a detailed paper on the topic which was published in the March, 2014, issue of ‘Institutional Investor’.
While AQR is a very active manager in many of its strategies, Asness also said this: “Even if markets are irrational, it doesn’t necessarily make active management a good idea.” And this: “It’s far safe for an individual investor, and ordinary investor, to assume a perfectly efficient market rather than a grossly inefficient one. An individual investor can buy with low trading costs.”
Asness worked for his tutor and friend, Fama, during post-graduate studies. He said: “Gene doesn’t say that markets are perfectly efficient. But he does think they are closer to perfect than Bob Shiller does and much closer to perfect than I do… I think bubbles are rare, but they occur.”
Asness believes there have been “two and a half” bubbles in his professional life: the Japanese equity bubble of the late 1980s, the tech bubble of the late 1990s and 2000 and the “half bubble” of mortgage-backed securities in 2007.
