It now runs long-only equities, risk-parity portfolios and hedge fund beta strategies alongside more traditional hedge funds, and manages about $30 billion. So it was more resilient when the financial crisis struck. However Asness felt more responsibility because the firm had grown from 13 to 200, and they had more clients. But since most funds managers underperformed in this period, Asness felt “nearly the same level of idiot” because AQR, too, failed to generate uncorrelated returns. alternative futures It’s surprising, but Asness’ investing hero is not the archetype of value investing, Benjamin Graham, or a disciplined academic whose quantitative work broke new ground, such as Fama. It’s Jack Bogle, the inventor of indexing. He admires the investment radical and founder of Vanguard Investments for pursuing something that made the world a better place.“The availability of index funds for big exposures didn’t really exist before him, and he did it in the face of the world and everyone telling him he was an idiot and accepting mediocrity.”

Bogle, who inspired the passive investment philosophy as well as a range of products, is a contrarian who proved his argument was correct. So it’s with some satisfaction that Asness volunteers this comment: “I like to say that I’m the hedge fund manager that Jack hates least.” This is because Asness is an agitator in the hedge fund universe. He says managers need to come clean about their sources of return. For too long, hedge fund managers have charged alpha fees while not disclosing how much of their returns are attributable to market risk and a set of replicable strategies that AQR has coined ‘hedge fund beta’. This argument is timely since many hedge funds generated lessthan- absolute returns during the financial crisis. This opacity from managers threatens what Asness described, in a two-part 2004 paper, as an An Alternative Future. He writes that hedge fund managers must kill off their “dark sides” – including the use of betas, high-water-mark abuse, unreasonable illiquidity and those “pesky” fees – before they can fulfil their promise of being real alpha generators in diversified portfolios.

Six years and a financial crisis later, he has more leverage for this argument. It’s clear that many hedge funds have not got rid of their dark sides, and if there is going to be an alternative future, managers and investors must agree upon realistic expectations about the role of hedge funds and what they can deliver. “Is there still an alternative future?” Asness asks. “If hedge funds can provide diversification, positive average returns, some transparency, are reasonably liquid and are something you can’t do yourself, then absolutely yes.” The explosive growth of hedge funds has encouraged less disciplined managers to build net long market exposures. Compared to running a range of different strategies, this has been the most convenient way to gain scale. “Being net long the market is more scalable than your own skill,” Asness says. This led some investors to comment, sarcastically, that hedge funds are not portfolio tools but compensation structures.

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