2007 Distinguished Alumni Awards
Image by Matthew Gilson
Clifford Asness, MBA ’91, PhD ’94, launched Goldman Sachs’s very successful Global Alpha hedge fund, left to start his own, beat the bubble in ’99, and grew his firm to manage $38 billion—all by the time he turned 40.
Chicago Booth Magazine asked professor Tobias Moskowitz to pick Asness’s brain on the future of hedge funds, the efficiency of markets, and why value investing works.
As a teaching assistant for finance professor Eugene Fama—often called the “father of efficient market theory”—Clifford Asness came up with his own idea for testing the efficiency of markets. He researched “momentum investing,” a popular short-term strategy of investing in stock purely because it’s rising. Asness decided the market was “reasonably close to efficient, but there are a lot of little inefficiencies,” he told the New York Times.
While trading mortgage-backed securities at Goldman Sachs, Asness was asked to set up a “quantitative research desk” using the new research from university finance departments. With John Liew, AB ’89, MBA ’94, PhD ’95, and Robert Krail, two colleagues he knew from the University of Chicago, he built a computer model that identified the cheapest value stocks based on up-to-the-minute data, but selected only those that seemed to have started on an upward swing.
Goldman used it to launch an internal hedge fund in 1998; Asness wound up managing $7 billion in two years. In 1997, he left Goldman to found AQR (Applied Quantitative Research) Capital Management LLC, with Liew, Krail, and David Kabiller, another Goldman colleague. The hedge fund they launched has grown from $1 billion to a diversified investment management firm of $38 billion, earning him the 2007 Distinguished Young Alumni Award.
Asness recently fielded questions from Tobias Moskowitz, professor of finance and Neubauer Family Faculty Fellow, who won the 2007 Fischer Black Prize from the American Finance Association for the top finance scholar under 40.
Moskowitz: What first got you interested in finance and becoming a professional investment manager?
Asness: It was random. I didn’t know what I wanted to do after high school. My father found out about a dual degree program at Penn between the engineering school and Wharton and said, “You should do that,” so I did. I studied finance and really loved it, and a few professors steered me to Chicago Booth. Finance had the combination of what I liked in the hard sciences with a much more practical bent.
Moskowitz: How did you come to start your hedge fund and why?
Asness: We were doing something similar at Goldman Sachs and decided that we wanted to focus full time on research and not on all the responsibilities that come with working at a huge firm. We also noticed that as well as you do at an investment bank, if you run your own hedge fund and do well, you do even better. Anyone who tells you they started a hedge fund without that being part of the motivation is probably not telling the complete truth.
Moskowitz: In light of your training here at Chicago under Gene Fama [MBA ’63, PhD ’64, Robert R. McCormick Distinguished Service Professor of Finance] and your experience in financial markets during the last 15 years, what is your stance on market efficiency, and how has that view changed over time?
Asness: I think the true answer to questions like “why does value investing work?” has to be a combination of efficient- market answers and inefficient-market answers. That makes it complicated because not only do both answers apply, but the mix may change through time as well. For instance, perhaps the reason cheap stocks beat expensive stocks on average is usually because they’re riskier and a bit too cheap—a combination of efficiency and inefficiency based reasons. But during the bubble of 1999 the answer was they were way too cheap and actually less risky; that is, most of the time there’s a combination of efficient andinefficient forces at work, but sometimes it’s much more one than the other.
I definitely don’t believe markets are perfectly efficient, but nobody does. It’s always been a straw man. I do believe for the average person to act as though markets are efficient is a pretty good strategy, and that the inefficiencies that exist are generally hard to exploit. That is, saying a market isn’t perfect is not the same as saying it’s easy to beat!
Moskowitz: What are some of the key lessons you learned at Chicago that you still use today?
Asness: Respect for data, its power, and its dangers. Seeing famous professors still doing their own programming and still working incredibly hard was a pretty good lesson to take away also.
Moskowitz: How do you think markets have changed, and do you feel those same lessons you learned will continue to be applicable going forward?
Asness: I think markets have changed less than people think, and yes, I think the lessons will apply going forward. Clearly there are more people searching for what’s called “alpha.” New products and greater liquidity abound. But people are still people, and I think less changes than stays the same.
Moskowitz: How has the competitive landscape of the hedge fund industry changed? Can you speculate on where you think it is headed?
Asness: While I don’t think the basics have changed, I think it’s going to be harder in the next 10 years than it was in the last 50 to make money doing pretty much anything, hedge fund or index fund. Risk premiums on traditional assets and the spreads hedge funds make their money trading are all tighter than historical experience. That does not make it impossible—not even close—but it does make it harder. I do think there will be some shake-out and consolidation in the hedge fund industry over time.