Why Cliff Asness, in whose fund we invested, is considered one of the best investors in the world

Vyacheslav Dvornikov

Nov 26, 2024

Cliff Asness is a billionaire, founder and head of AQR Capital Management, which manages $110 billion. He is one of the pioneers of quantitative methods and remains a proponent of value investing. Asness continues to publish academic research on relevant, not just theoretical topics. The GEIST fund has invested in one of AQR's funds, and we will share details in one of the following texts. In this one, we tell the story of AQR, Asness's views, and the market crises the company has gone through.

The Emergence of AQR and Cliff Asness's Philosophy

AQR's strategies are based on well-studied signs or characteristics that prove the existence of a sustainable premium. All of them are outlined in peer-reviewed academic research. Such a scientific approach is not surprising, considering Asness's path before starting work in the financial industry. After graduating from the University of Pennsylvania, he, dreaming of an academic career, entered the University of Chicago's doctoral program in finance at the Booth School of Business under the guidance of Eugene Fama and Kenneth French. Fama and French developed the factor method of stock analysis. Asness, who received his Ph.D. in the early 1990s, helped popularize it among investors engaged in quantitative methods.

In fact, Asness's doctoral dissertation was devoted to momentum investing and why it works. Asness notes that his dissertation advisor Fama was not thrilled with this conclusion, as it seemingly contradicts the idea of market efficiency — Fama's main hypothesis.

Quantitative methods were gaining popularity on Wall Street at the time. After a summer internship, Goldman Sachs wanted to hire Asness permanently to create a group that would engage in quantitative research. As Asness believes, the bank was inspired by the fame of Long-Term Capital Management (LTCM) — a hedge fund among whose founders were future Nobel laureates in finance. Asness became managing director and director of quantitative research for Goldman Sachs's asset management division.

In 1998, Asness and his associates, who left Goldman Sachs, founded the quantitatively modeled fund AQR (Applied Quantitative Research). Quantitative methods remain central to the company even now, while Asness, as noted by Institutional Investor, has a long-term value investor perspective.

AQR has never offered funds focused solely on value. In most of them, the 'momentum' factor, as well as other fundamental indicators such as profitability and quality, have equal weight.

Indeed, Asness argues that value and momentum complement each other well. 'A good period for a trend-following strategy, or momentum strategy, often turns out to be not such a good period for a value investor investing contrarian,' he notes. Value investors can hold positions for years, while momentum by definition is much more dynamic, says Asness.

Crises AQR Has Gone Through

AQR was founded just days before Russia defaulted on its debts, LTCM approached bankruptcy, and the S&P 500 plummeted. However, in the first months, AQR was doing well.

But over the next 1.5 years, the dot-com bubble inflated, and the data AQR relied on in its models turned out to be useless. 'In 50 years, the value strategy had never been so destroyed over 18 months,' Asness says of that period. The peak came in March 2000, and then the bubble burst. According to Asness, this event became an existential threat to the nascent company, but soon AQR was able to breathe a sigh of relief.

The value strategy returned, and the 'golden era' of hedge funds began, which found it significantly easier to outperform the markets. But on the eve of the 2008 financial crisis, in August 2007, AQR, like other quantitative funds, experienced another shock. This was the so-called quant crash. Hedge funds, victims of excessive leverage and overcrowding in the same stocks in their portfolios, briefly went deep into the red. AQR's quant funds suddenly fell by as much as 13%.

After this, a revival of quantitative strategies began, and more hedge funds started offering them to investors. By 2018, AQR became the second-largest hedge fund management company in the world, and Asness and two other AQR founders, who went through all the difficulties together, made it to the Forbes billionaire list.

Then came the so-called 'quant winter.' Although 2018 and 2019, as Asness says, were 'terrible' for AQR, even greater losses occurred in the 9 months after the pandemic began and the surge of everything related to technology and growth stocks. The company's assets at that time fell by 50%: a third of this was due to a decrease in portfolio value, the rest was related to outflows, primarily from retail investors.

The fact is, AQR was one of the first major firms to offer liquid alternatives to hedge funds, which it introduced in 2009. As a result, AQR closed several mutual funds. Losing half of the assets during the 'quant winter' was tough for AQR — and the duration of the difficult period made it more challenging than the losses during the dot-com bubble, says Asness. But he notes that AQR never faced such an existential threat as in 1998.

Nevertheless, investors credit Asness with the emergence of AQR mutual funds. Larry Swedroe praises Asness and AQR for attempting to 'democratize' the financial world, offering a wider range of investors more sophisticated strategies 'without charging 2/20 fees.'

What's Now

The results of recent years confirm that Asness's approaches work. After 2020, AQR Absolute Return's flagship fund shows outstanding performance. In 2021, its growth was 16.8%, in 2022 — 43.5% (the best result since its founding in 1998), in 2023 — 18.4%. This year from January to October, the growth is 9%.

Overall, the company offers dozens of strategies — from hedge funds to long-only and mutual funds. Most of the $50 billion invested in hedge fund strategies is in absolute return funds. They are market-neutral and designed to make money in any market conditions. These funds invest in any factors, including both value and momentum. AQR also manages total return funds.

Since the 'quant winter,' AQR has not changed its approaches but constantly adds strategies and improves its analysis. For example, in 2020, the company launched AQR Apex Strategy, a multistrategy hedge fund — the most aggressive in terms of adding new signals indicating to models where, when, and how much to trade. This fund grew by 16% in 2023 and by 8.1% from January to October 2024.

Asness himself continues to actively engage in academic activities, speak at conferences, and publish research, including in The Journal of Portfolio Management, where he recently spoke about market efficiency. In his blog on the company's website, he often advocates for value investing, as in May 2020, when growth stocks were pushing the market up. These studies and texts are open to both investors and the academic community.