Cliff Asness believes in momentum in stock prices, but does he believe in momentum in investment strategies? His PhD thesis was about momentum in stock prices. Here is how he explains what momentum is:
“Momentum investing strategy is the rather insane proposition that you can buy a portfolio of what’s been going up for the last 6 to 12 months, sell a portfolio of what’s been going down for the last 6 to 12 months and you beat the market. Unfortunately for the sanity, that seems to be true.
…if you are running its large cap US equity, something like the Russell 1000 and you bought the 1/3 of stocks with the supreior 6 to 12 month returns, you probably make a 125 basis points extra long term on average. If you do that in small stocks it’s more like 250 to 300.
…Almost anything we find in investing, almost any regularity this tends to beat this, seems to be larger for small stocks.”
You can watch the full video below:
My question is this: would it be insane to think that investment strategies that beat the market in the last 3 to 12 months will continue to beat them in the following 3 months?
Cliff Asness shared his latest thoughts about the poor performance of liquid alternative strategies. These are the bread and butter strategies of AQR. He is trying to convince himself and his investors about keeping the faith and being invested in these strategies. This doesn’t make sense to me. His philosophy is to sell stocks that underperformed (he doesn’t dwell on whether it’d make sense to keep the conviction and stay long in stock) and instead buy the stocks that outperformed, yet he doesn’t do this with investment strategies.
Well, we do it. Our best performing hedge funds strategy identifies the 100 best performing hedge funds and then invest in their consensus stock picks. We don’t care whether they follow momentum investing, value investing, or what their macro views are. Every three months we get rid of fund managers who underperform and replace them with that month’s top performing managers and their strategies. How did we do by doing this?
We launched this strategy in May 2014 and our strategy generated a cumulative return of 121%, vs. 66.6% for the S&P 500 ETF (SPY) during the same period. We basically outperformed the market by 54 percentage points in a little over 4 years. This is much better than what Cliff Asness did with his quant strategies.
Our strategy’s outperformance is actually accelerating. Over the last 12 months it returned 50.4% and beat the market by 29 percentage points (see the details here). You can check out our newsletters and latest stock picks free of charge for 14 days if you follow this link.
You can also download Cliff Asness’ entire letter below: