Long-only managers need to change or go the way of other dinosaurs – AQR founder

Long-only managers are dinosaurs and the future of active investing is “something that looks like a hedge fund” according to Cliff Asness, managing and founding principal of AQR Capital Management.

Speaking via satellite at the Russell Investment Summit last week, Asness said that in the long-term the structure of a long-only manager needed to change. Managers would have to split beta and alpha. “Long-only managers are dinosaurs, but they’re still alive,” he said. “Managers will split what they do, the managers may remain the same but the structure will change,” he said. “The market place is changing and, we need to change to keep relevant.” Asness said it did not make sense to buy alpha and beta together and he predicted in the future that the core of a portfolio would be made up of an indexed fund and “something like a hedge fund”. However, he said, the hedge fund industry now contained a lot of beta or ‘opacity’. “The current world is dominated by things like home bias, pure alpha is a very scarce resource,” he said. Asness said hedge funds should be one of two categories. The first takes investment skill or alpha and turns it into a separate investible vehicle, which could be bought separate to the assets. The second, loosely termed arbitrage strategies and starting to be called hedge fund betas, were a set of strategies that uses non-traditional tools for a fairly systematic value add. “Both need the tools of modern finance, involve short selling, and make use of some leverage. In real life these two categories are not as distinct, and it is typical for a strategy to start as an alpha and become exotic beta or a strategy copied by others,” he said. “But both of these types of strategies can make the investing world a better place. Good stock picking helps correct prices and arbitrage provides liquidity.” He said hedge fund strategies also provided fee clarity which was good for the investor. The Asness session at the conference included presentations from Douglas Hodge, the Tokyo-based regional managing director for bond manager PIMCO, and Marcus Smith, the director of Asian research for MFS Investment Management. Hodge flagged the possibility of a recession in the US, although he said this was still too early to say. He noted that never had their been such capacity in the US housing market without it being followed by a recession. Smith was more upbeat, specifically for the region, although valuations were expensive in terms of their pricing rather than cyclicality. “Structural growth continues to be higher than developed markets,” he said.