It was only when Goldman asked him to work for a year that he realised how this research could be applied to funds management. It can be interesting to ask mavericks about their first fight against the crowd. Asness’ early contrarian victories require some effort for most people to understand because they are embedded in the “geeky” universe he and other quants inhabit. In his first year at GSAM, the US Government debt yield curve was very steep, and some investment strategists were unable to accurately value fixed-income options based on the underlying debt. They threw up their hands, claiming that pricing models were broken. Seeing this, Asness wrote the “page-turner” called OAS Models, Expected Returns and a Steep Yield Curve, in which he argues that fixed-income option pricing models weren’t broken, but the complaining strategists had misunderstood them. This was Asness displaying, early on, his odd vigilantism in a very geeky field. He became bolder – particularly after launching AQR. He stuck to his models during the dotcom bubble, and argued that investors should Fight the Fed Model used to value the US equity market.
These papers attempted to set the record straight, but they also developed a reputation for himself and the firm. “I think of some of the papers I wrote early in my career, and the equivalent now at AQR would be a fire-able offence. Once you’re running $30 billion of client money, that idea – ‘hey, we came up this model and it works!’ – is not such a smart idea. Maybe when you run no money and you want to prove to the world how smart you are, you tend to go in that direction.” Being a contrarian is risky. It’s easy to grab an industry’s attention by saying something unconventional; proving that you’re right is the challenge. “Now, what I’m proud of is that I haven’t been dreadfully wrong,” Asness says, because there is a high premium on offer for the contrarian who calls it correctly.
“If you take the contrarian stance, the world wants you to fail because more people believe the opposite and don’t want you to win. But I haven’t made any massive, celebrated screw-ups in arguing my contrarian stances.” So far, AQR’s track record proves its models are run by a pack of talented quants. Despite Asness’ tendency to tilt at windmills, it’s the long-term returns that keep clients content and cement his credibility. But for all his book smarts and entrepreneurial skill, he is acutely aware of one crucial factor in any success story: Lady Luck. rolling dice Fortune is a risk factor that no investor can prepare for, and Asness has been cursed and graced by its vicissitudes. “If you don’t recognise the role of luck in your life, you’re just not paying attention. You’re over-arrogant,” he says. His time at GSAM coincided with the firm’s explorations of quantitative funds management, and after his bosses learned he was being headhunted by PIMCO to start a quant program on the other side of the country, they offered the 26-year-old leadership of its new Quantitative Research Group (which was separate to the existing Quantitative Equity Group).
