Cliff Asness would prefer you not talk about Peloton, the home exercise bike company whose stock soared beyond all rationality during the early days of Covid, when everyone worked — and worked out — from home. That period was one of pain for Asness and AQR Capital Management, the quant hedge fund he co-founded in 1998 just before an earlier tech bubble that, as he will tell you in mind-numbing detail, was an especially traumatic event for the firm’s value-oriented strategies.
“Peloton bothers me in two ways,” Asness offers. One might expect that statement to be followed by a wonky analysis about the value factor in quant investing that he is known for espousing. Instead, the repartee goes like this: “One, it brings back those memories of that period,” Asness says, referring to AQR’s drawdown in 2020. “And two, I use mine as a coat rack, so I feel kind of guilty when someone says ‘Peloton,’” he deadpans. (Asness confesses he gained weight during Covid because “eating is something you do when you’re losing a lot of money.”)
Humor is an Asness stock-in-trade, and it can be self-deprecating and savagely pointed at the same time, whether it’s directed at “hedge funds that don’t hedge,” the “volatility laundering” of private equity — or himself.
Of course, it’s easier to joke about bubble stocks like Peloton now that the 57-year-old fund manager is no longer losing money, but is making it handily. Perhaps a sure sign of the turnaround is that Asness was looking fit when Institutional Investor interviewed him in his sprawling office at AQR’s headquarters in Greenwich, Connecticut, last month. (He can see Long Island Sound — and avoid looking at the I-95 freeway — while sitting at his desk.) On the other side of the building is the Metro North railroad station, convenient for all the reverse commuters who pour into AQR’s office and those of several other hedge funds in the same building.
During the tough years, Asness kept telling anyone who would listen that the funds would bounce back because value investing was going to recover — which it ultimately did. During the past three years, AQR’s top strategies had double-digit returns, and 2024 looks to be another winner.
For example, following a more than 30 percent decline from the peak in 2018 to the trough in 2020, AQR’s flagship Absolute Return fund had a blowout year in 2022. It rose 43.5 percent, the best performance since launch in 1998. The Absolute Return Fund’s comeback started at the end of 2020. In 2021, it gained 16.8 percent, and last year it jumped 18.4 percent and became the top-performing multistrategy fund among its peers. This year, it climbed 10.8 percent through August, according to someone familiar with the results.
“Cliff absolutely is a survivor,” says Michael Trotsky, chief investment officer of Massachusetts Pension Reserves Investment Management, which has been an AQR investor for 15 years and now has about $1 billion invested in two of the firm’s funds. “He and AQR believe in value, and being a long-term believer in that style is a rarity these days.” Trotsky calls Asness “a big bright light” in the investment landscape.
“We are hard to kill,” quips Asness.
Yet despite the resurgence, AQR’s $110 billion in assets are less than half of their peak of $226 billion before what has been dubbed the “quant winter.” With offices around the globe, the firm remains a behemoth, offering dozens of strategies in everything from hedge funds to long-only and mutual funds.
The majority of its $50 billion in hedge fund strategies is in absolute return funds that are market-neutral and designed to make money in any market. These funds invest in any number of factors, including both value and momentum. AQR’s managed-futures offerings, which are trend followers that are momentum-driven, are considered an absolute-return strategy. AQR also offers total return funds — primarily risk parity funds that add leverage to a wide variety of asset classes to create more risk-balanced portfolios.
Looking back, Asness says, “I don’t think I was wrong from that period for our form of value, but the old saw in this industry is ‘early is the same thing as wrong.’”
He disagrees. Asness had defended value during the hard times on “Cliff’s Perspectives,” his famous AQR blog. One blog post on the topic was in in May 2020, just as Covid led to the explosion of growth stocks — and another leg down for value. Asness has no regrets. “If you’re saying a very diversified global value strategy looks very cheap now against an expensive set of stocks, the notion you’re going to nail it to the day is childish,” he says. “But if you’re looking at the next three to five years, I think judged on that scale, I do think I look pretty good.”
That doesn’t make the pain any less tolerable. Says Asness: “Being even a year early can be absolutely excruciating in this business.”
Asness’s path to the tough but ultimately financially well-rewarded life of a hedge fund manager wasn’t something he ever dreamed of as a child, or even while studying finance at the University of Chicago Booth School of Business under Eugene Fama and Kenneth French, who developed the factor method of analyzing stocks that Asness helped popularize with quant investors in the 1990s.
Growing up in Long Island, New York, Asness figured he would become a lawyer like his father, who was an assistant district attorney in Manhattan. He admits he wasn’t a motivated student. “I was very lazy, and I could get away with it.” Perhaps not surprisingly, he says he was the class clown and loved high school.
But when he took the SATs before entering college, his scores were so high that Asness was accepted to the University of Pennsylvania largely based on the results, and the pressure was on.
“I was in a panic. I had told people for years that when it really counts, I’ll step up,” he recalls. Yet, he says, “I didn’t even know how to study. I had just kind of half-assed everything. So that was a little rough, but I just fought my way through it and started to do well.”
Good at math and ready to forgo a legal career, he decided on a double major in finance and computer science. “I went from being a type B person to very, very type A in an hour and a half after getting to college, and I’ve never changed back,” says Asness.
He also had a new plan. On graduating from Penn, he went to the University of Chicago and enrolled in a PhD program under the two finance heavyweights who became formative in his life story. “I wanted to be a professor. I had an intellectual life in mind,” says Asness.
However, a summer internship working for Goldman Sachs on Wall Street led to another detour, and the rest is hedge fund history. Soon Goldman wanted to hire Asness full-time to help it start a quantitative research group, an effort he believes was driven by the fame of Long-Term Capital Management, the hedge fund whose founders included future Nobel Laureates in finance and that was, he notes, “the toast of the town” at the time.
“There was a whole thing on Wall Street saying we got to get some academics here,” Asness says, suggesting he was lucky to be in the right place at the right time. He finished his PhD in the early 1990s while at Goldman, where he also ran what would become one of the biggest and most famous hedge funds of the era: Global Alpha. In 1998, he and Goldman colleagues John Liew, David Kabiller, and Robert Krail left to start AQR, which stands for Applied Quantitative Research.
“We had a really good first month,” Asness recalls wistfully. AQR launched just a few days before Russia defaulted on its debt in August 1998, and soon LTCM was on the ropes and the S&P 500 was collapsing. But the young men who’d just started AQR did fine — in fact, they were up during this mini crash. “We’re thinking we are the greatest things on Earth here,” Asness says.
But they quickly learned a lesson that has stayed with him: “Never feel good about yourself in this business.” Within 18 months, the dot-com bubble was inflating and the data AQR was relying on for its models appeared useless. “The value strategy had never been that destroyed over an 18-month period in 50 years of data,” Asness explains.
The pain peaked in March 2000, then the bubble collapsed. The event had been an existential threat to the upstart hedge fund, Asness says, and AQR breathed a sigh of relief. “To be frank, when you’re a new firm from a standing start and you have a terrible first year, there’s a chance everyone’s going to abandon you.”
Value soon bounced back, leading hedge funds into a golden era. But in a precursor to the 2008 financial crisis, in August 2007 AQR experienced another scare, during the so-called quant crash. It led hedge funds to tank briefly, victims of overleveraging and crowding into the same stocks. The temporary losses famously led Asness — who admits he has a short temper — to punch out his computer monitor when AQR’s quant funds were suddenly down as much as 13 percent.
Fortunately, the distress was short-lived. Soon, a full-blown resurgence in quant strategies was underway, and other hedge funds began to add quant capabilities to their offerings. By 2018, AQR was the world’s second-largest hedge fund firm, and Asness and two of AQR’s founders — who had stuck together through thick and thin — made the Forbes billionaires list. (Krail had resigned years earlier for health reasons.)
It was an odd moment for AQR. “We’re not used to being the cool kids,” Asness allows.
Then came the quant winter. Asness hadn’t seen it coming — and probably could not have. On the ten-year anniversary of the quant crash, in a blogpost titled “The August of Our Discontent,” Asness wrote: “One of the only things we can be fairly certain about is that the next crisis won’t be a repeat of the last, but they probably will rhyme.”
The rhyming, however, was not with 2007’s quant quake but with 1998’s dot-com bubble. Looking back, Asness says that though 2018 and 2019 were “terrible,” more than half of value’s losses happened in the nine months after Covid emerged and everything tech- and growth-related soared. “If Covid never happened, it’s very possible the bubble would’ve looked a lot more like the prior one,” he says. Instead, it lasted a lot longer. As Asness had noted only a year earlier, quant crashes are “rare and wild events.”
He says performance accounted for one third of AQR’s 50 percent asset decline at the time. The rest was due to outflows — most notably from retail investors. AQR had been one of the first institutional firms to offer mutual funds “liquid alts” — hedge fund–like strategies — which it rolled out in 2009. Those investors were quick to sell during the drawdown, and eventually AQR closed several of its mutual funds.
That said, investors credit Asness with AQR’s foray into the mutual fund world. Larry Swedroe, who was the head of financial and economic research for Buckingham Wealth Partners before it merged with the Colony Group, lauds Asness and AQR for trying to democratize finance by bringing more-sophisticated strategies to the public “without charging 2 and 20.” Swedroe has long been an investor in ten-year-old mutual fund AQR Style Premia Alternative, which invests in four factors: value, momentum, carry, and defensive. It is up 18.42 percent year-to-date and as of September 5 has a five-year average return of 10.77 percent. (The fund’s worst year was 2020, when it fell 22 percent.)
Losing half of its assets during the quant winter was tough for AQR — and the setback’s duration made it more difficult than the losses of the dot-com bubble, says Asness. But he notes that AQR at no point faced the same kind of existential threat as in 1998.
He’s now sanguine about it all. “I have two simultaneous but inconsistent thoughts about the peak of this last bubble,” he says. “One, I cannot see how anyone stuck with us given how painful it was. Two, given the evidence on our side that we were going to be right, and having lived through it before and seeing the movie that we were going to be right, I cannot see how anyone left us.”
He adds: “When things are really tough, what are your options? You’re like, ‘We believe in this, we think it’ll come back.’ And to be fair, we don’t really know how to do anything else.”
During the depths of AQR’s recent troubles, Asness says, he “entertained” the possibility that the firm was wrong in its value analysis, yet, he asserts, “I never got to the point where I said, ‘I actually think we’re wrong,’ or else we would’ve changed what we do.” He insists that “we kept a fairly wide-open mind that we could be wrong. We investigated every story for why this time famously might be different, why the expensive stocks might be worth this much more than the cheap ones.”
A well-known critique of value strategies is they don’t adjust for intangible assets, so, he says, “we looked at intangibles.” AQR also examined measures that had nothing to do with intangibles, like price-to-sales ratios. However, Asness says, “the losses were as bad and the spreads were as wide.”
He explains, “We went through hundreds of hypotheses generated by the outside because the world’s very good at explaining why whatever’s been happening is just and true and will happen forever.” But the rigorous analysis could find no reason the value factor was doing so poorly compared with momentum, which suggested that rising stocks would continue to climb. “We kept saying, ‘Maybe it’s this, maybe we are wrong.’ And we kept saying, ‘Well, no, we’re not.’”
Asness says he simply “powered through” the pain. He even tried meditating to relieve the stress. “I thought a good title for an autobiography for me would be World’s Worst Meditator because of the imperative to keep your mind blank. That’s very hard to do. I got about 45 seconds in before I’m thinking, ‘Oh, that was a really bad Tuesday, but I think we should change this in the model and we should test it.’ So I’m not a good meditator.”
In retrospect, though Asness doesn’t find anything wrong in the models AQR was using, he now realizes that a decade of strong returns led AQR to become “a little fat and happy.”
He says, “We got way too big. We said yes to everything for at least the last five years,” before 2018. If someone wanted to hire a team to explore a new strategy, AQR approved it. “It’s not even the money you waste, it’s the organization gets flabby and loses focus,” he notes.
The firm had no choice but to shrink, ultimately losing about 40 percent of its 1,000-person staff in a combination of layoffs and attrition. Asness says that was particularly difficult for him. “The most painful thing in my entire life was having to shrink the firm. Having to let good people go just crushes me.”
Asness says he’s really a “softie,” a description friends and colleagues also use for him. Trotsky remembers talking with Asness during the tough times: “When things are bad, he really wears it on his sleeve. He’s really a miserable beast when he’s not making money for his clients. And that’s exactly the kind of partner we want to be with.”
Such empathy might come as a surprise to those who know Asness primarily through his pointed critiques and his battles on Twitter (now X). Asness says he has gotten into fewer of those lately, but a quick search of his X feed reveals he recently called one political candidate “a dumb person.”
He seems to enjoys the jousting. “I have a perhaps wildly overstated view of my own quick-wittedness and ability to write something pithy, making Twitter admittedly somewhat addicting for that dopamine hit when you say something you think is nailing it,” Asness says.
His friends agree that his words can be powerful. “He’s very quick, very sharp. I would not want to get into a debate with him where it was allowed for him to eviscerate the opponent,” says French, now a professor of finance with the Tuck School of Business at Dartmouth College who has brought Asness into his classes as a guest lecturer dozens of times.
A favorite target, on X and elsewhere, is private equity. Asness famously coined the term “volatility laundering” to explain how private equity can smooth out its returns by avoiding marking its book to market. He believes that doing so “grossly” understates the risk involved.
In the 1980s, when the Yale University endowment’s chief investment officer, David Swensen, pioneered institutional investing in hedge funds and private equity, Asness says, illiquidity and not marking assets to market were viewed negatively. To compensate, investors expected higher returns. That illiquidity used to be a bug, Asness explains, but it’s now a feature people are willing to pay more for — in terms of lower returns. “Now the volatility laundering itself is one of the selling features” because the smoothed returns are “much easier to live with,” he points out.
Many academics have shown that private equity and public market returns are similar, and Asness suspects they might be right. “I can’t tell you it’s negative, but I think if [privates] had an edge against public at all, there’s a very good chance it’s smaller or even inverted now because it used to be something you had to put up with to get the higher returns.”
Asness agrees with his friends in the private equity world who argue that markets can be crazy in the short term, so it’s reasonable to ignore those gyrations. But he asks: “Why don’t I get to do it?” (He quickly adds that a fair amount of his critique is professional jealousy: “I would love to be able to mark my portfolio to what I think it’s worth, not what the market says.”)
In 2019, Asness even wrote a send-up of private equity by suggesting AQR would offer a new fund called S.M.O.O.T.H. “It provides the same long-term attractive expected returns as our other offerings, yet at a fraction of the volatility, with very few to no embarrassing losses. For instance, while 2018 was a very painful year for many of our strategies, for many other liquid alternative products in general, and, to some degree, a poor one for virtually all traditional liquid asset classes and most geographies (e.g., long-only stocks and bonds), the S.M.O.O.T.H. Fund would’ve sailed through largely unscathed,” he wrote. “This fund will be amazingly easy to stick with, and the long term should truly be great. That’s worth a premium, and we don’t feel even slightly guilty about it,” he quipped.
Since the quant winter, AQR hasn’t changed its stripes. But it is constantly adding strategies and refining its analysis. For example, in 2020 it launched the AQR Apex Strategy, a multistrategy hedge fund that is its most aggressive in terms of adding new signals telling its models where, when, and how much to trade. That fund gained 16 percent in 2023 and was up 11.1 percent this year through August, according to an individual familiar with the results.
“They keep trying to improve,” Swedroe says. He praises AQR for strategies “that are based upon peer-reviewed, academic, well-researched traits or characteristics — securities that have evidence that there’s a premium that’s persistent.” he says. “It’s pervasive. It’s robust to various definitions. It survives transaction costs. And there are logical economic or behavioral reasons to think those premiums will exist.”
Asness and AQR also get credit for publishing their research, making it available for the rest of the investment and academic communities. “They believe in research, they stay cutting-edge, they share their research. And I think it has helped advance not only AQR, but the whole industry,” Trotsky says.
Asness also writes for numerous academic finance journals such as The Journal of Portfolio Management, where he is on the ambassador board. His latest piece for that publication is a 23-page tome on why markets have become less efficient during his career as a professional investor. Asness has been opining on this topic for a while, and the treatise, “The Less-Efficient Market Hypothesis,” gives substantial backing for his argument.
If Asness is correct about “less efficient” markets — which he partly blames on social media — “disciplined, value-based stock picking is both riskier and likely more rewarding long-term,” he says.
Yet for all his defense of value, Asness is quick to point out that he’s not only a value investor. In fact, his PhD thesis was on momentum investing and why it worked. (His mentor Fama wasn’t excited about that conclusion, Asness notes, as it seems to clash with the idea that markets are efficient, a core Fama hypothesis.)
AQR has never offered a fund that has focused only on value. And most have been offset by an equal weight to the momentum factor as well as other fundamental issues such as profitability and quality.
Indeed, Asness argues that value and momentum work well together. “A good period for a trend follower or momentum strategy is often not such a great period for a contrarian value investor,” he points out. Value investors can stick with positions for years, where “momentum by definition is much flightier,” he says.
But having the long-term view of a value investor doesn’t make the day-to-day business of investing any less stressful. “A bad day can drive him nuts,” says Dan Villalon, global co-head of the Portfolio Solutions Group at AQR. He tells a story of how Asness coped when the stock market fell 5 percent on August 5.
“Cliff, as many of us do, got a WhatsApp message that is just total spam,” Villalon recalls. The message was from someone looking for a consultant 24 years of age or older to review restaurants. The pay? Twenty dollars an hour.
Villalon says Asness forwarded the message to all the principals and managing directors of the firm. Then, with his characteristic humor, Asness asked, “Are markets doing worse than I am aware of?”
