Quantitative investment strategies suffered poor performance last year, but there isn’t one intuitive way to pinpoint exactly why it happened, said Cliff Asness, managing principal and chief investment officer at AQR Capital Management.
It’s easier to explain why one individual component of a multifactor strategy underperformed, such as why the value factor lagged, he said. But explaining total performance in down years is difficult, especially over the short to medium term.
He said these questions don’t usually come up on good years, since no one questions why they are making a lot of money. But in a tough year, people ask questions.
“In a tough year, you need intuition,” he said.
Asness spoke Thursday at the Morningstar Investment Conference in Chicago.
When combined into a multifactor strategy, individual factors temper one another to smooth out volatility, limiting an individual factor’s upside and downside. But it’s hard to discern why a particular factor’s outperformance or underperformance can affect total performance, he said.
It’s not unlike a conglomerate company, but instead of owning a basket of different firms, AQR owns baskets of factors. “Conglomerates are good on most of the factors you like. It might not be the cheapest in value, not the best in momentum or have the highest profitability, but together they’re good on all these things,” he said.
While this basket works in the long term, explaining short-term performance is harder. And when short-term performance lags, it leads people to think perhaps the strategy is broken, he said. But he has no plans to change.
“Success is sticking with [the strategy] with its ups and downs. To survive long term, brace for the short term,” he said.
He admits that it’s easier to stick with a strategy that is intuitively easier to understand, “even if it’s not a better strategy.”