Cliff's Perspective

Latest Posts



    • Topic:

      Corporate Governance

    In this editorial, in the Wall Street Journal no less, two accomplished executives who should know far better argue not to expense stock options for employees making less than $100,000 a year. Why not also ignore the wage expense of these same employees? I will explain. It's obvious idiocy. Ok, maybe I'll explain a bit more. An expense is an expense. If you want to help "inequality," go for it, but do it honestly and directly not by warping the accounting system and bending rules you still (incredibly) object to and would obviously discard in total if allowed (it's obvious ...

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  1. February 12, 2017
    • Topic:

      Factor Investing, Style Investing

    Our latest paper Betting Against Correlation tries to look deeper into what drives the low-risk effect. In short, we create a new priced factor that helps distinguish between competing, and confounding, stories explaining the efficacy of low-risk investing.

    Recall that the low-risk effect is the tendency for low-risk assets to do better than they should versus high-risk assets. That’s a loaded sentence as I haven’t defined risk or how we should measure “better than they should.” When it comes to the low-risk effect, risk has been measured in many ...

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  2. February 09, 2017
    • Topic:

      Alternative Investing

    There is a recent post by Eric Nelson that uses AQR to make one really good point and then to, kind of oddly, pointedly not ask the next logical question. Here I ask and answer that question.

    Eric reminds us that what the average investor in a fund gets is different from the return of that fund. That’s true and important. If they get in and out with poor timing they can sabotage themselves. Next, his thesis is that investors in “alternative” funds, funds meant to be diversifying to traditional investments and often using more hedged strategies, are worse ...

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    • Topic:

      Portfolio Management

    The Department of Labor’s Fiduciary Rule, which is applicable to retirement plans subject to ERISA such as 401(k) plans and to certain other retirement plans such as IRAs, is set to go into effect in April 2017. What the rule does is extend a fiduciary duty or standard to a broad set of investment advisors (many, particularly at broker-dealers, who were previously exempt) who provide recommendations to such plans. A "fiduciary duty” is the highest standard of care recognized in American law. Among other things it means that you must act solely in the best ...

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    • Topic:

      Portfolio Management, Risk Management, Factor Investing

    Writing my post titled “2016 Was Not a Particularly Volatile Year” on realized risk/variability turned out to be even more fun than usual as I got a lot of great comments on it. Of course, some didn’t buy it. Some said things like “yeah, but you have to admit this or that was crazy,” whatever this or that was. Sometimes I agreed, sometimes I didn’t. We all have a different definition and standard for crazy! By far the most common comment was “ok, you just looked at the S&P 500, what about…?” I can’t look at ...

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    • Topic:

      Portfolio Management, Risk Management, Factor Investing

    Maybe it’s just me but a lot of end-of-year commentary about financial markets in 2016, implicitly and sometimes explicitly, makes it sound as if it was a crazy year. It wasn’t. In fact, it was amazingly normal. This is true of at least the S&P 500 (I’m not going to be more ambitious here) which is what I think many of these commentators are talking about.1,2

    Annualized daily volatility during 2016 came in at 13.1%. Based on rolling same-length periods going back to 1929 this falls at the 47th percentile.3 You say you don’t want to compare to ...

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    • Topic:

      Portfolio Management, Risk Management, Factor Investing

    There has already been much ink, and maybe even some blood, spilled debating the merits of “Active Share” for judging an investment fund. There was the original paper, a critique of that paper written by some of my colleagues, a reasonable (which doesn’t mean I agree with it) response to AQR’s piece, and even a seriously deranged1 response to my colleagues’ work (thankfully I’m known for a certain aplomb and even sangfroid in such tense situations and have helped calm everyone down). I don’t seek to re-open this debate but, ...

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    • Topic:

      Hedge Funds

    After many years (decades) of being one of the very early hedge fund critics I've recently (tepidly) defended hedge funds from overwrought attacks that wrongly compare them to a beta of 1.0 in a bull market and, as usual, act as if we learn more from a few years than we really do. In these tepid defenses I share my own concerns that this tepidity (if not a word it should be) is intentional and permanent.[1] That is, mine is a defense against a near legion of badly targeted criticism, but not close to an “all clear” sign that hedge funds don’t merit any ...

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    • Topic:

      Portfolio Management

    I admit that there is no type of result I enjoy encountering more than one that seems so counterintuitive, so against accepted wisdom, so surprising that I didn’t see it coming at all. Even more enjoyable is the rare occasion when that epiphany is my own. Alas, my subject today only fulfills the first criterion, as sadly, this particular insight wasn’t mine…

    The related topics of, “How much active management is necessary?” (and, conversely, “How much indexing would start to be a problem for market efficiency in both pricing accuracy ...

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  3. September 02, 2016
    • Topic:

      Market Efficiency, Index Investing, Factor Investing

    The recent Sanford Bernstein research note calling indexing “worse than Marxism,” created quite the kerfuffle. In my Bloomberg op-ed article, I discuss how the Bernstein note, while perhaps kick-starting some valuable discussions in the world of finance, missed, or at least minimized, something much more important — free riding on price signals is not a bug of Capitalism to be exploited by “greedy red indexers,” but instead may be the most important feature of Capitalism.

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