Matt Levine at Bloomberg:
Hedge-Fund Genius Isn't Really Sold on Hedge Funds
Here you can read 10 internet pages about the efficient markets hypothesis by Cliff Asness, who runs the quant hedge fund AQR Capital Management, and John Liew, another founding principal of AQR. You can probably figure out for yourself if that's the sort of thing you'd enjoy. I enjoyed it very much, so I give it my usual conditional recommendation, the one where if you like what I like you'll like this thing I like. You will! If.We have a bit of a man-crush on Asness who, along with Fischer Black, Thorpe, Derman, Wilmott and Simons can be considered among the quantfathers. (see what I did there?)
I also give it an additional conditional recommendation, which is that if, like me, but even more like a lot of other people, you spend some amount of time snarking glibly about market efficiency, or pointing to dumb stuff like Nest/Nestor and saying, "so much for your efficient markets har har har," you really ought to read Asness and Liew's piece. It discusses the joint Nobel Prize awarded to Eugene Fama, who's largely responsible for the efficient markets hypothesis (and also for teaching Asness and Liew economics), and Robert Shiller, who's a critic of the EMH and a behavioral finance pioneer, and it does a good job of laying out exactly what it would mean for markets to be efficient, and why it's not as simple as it sounds:
To be able to make any statement about market efficiency, you need to make some assertion of how the market should reflect information. In other words, you need what's called an equilibrium model of how security prices are set. With such a model you can make predictions that you can actually observe and test. ... You cannot say anything about market efficiency by itself. You can only say something about the coupling of market efficiency and some security pricing model.Market efficiency means that "security prices fully reflect all available information," but you need a model of how they reflect that information. And so Asness and Liew walk through various "anomalies" -- that value stocks outperform what a simple capital-asset pricing model would predict, or that momentum investing can outperform simple indexing -- and weigh whether they reflect "inefficiency" or rather just inadequate pricing models. Does the value of momentum investing mean that investors are irrational and that stock prices don't rationally incorporate all available information? Or is there some rational pricing model that says the above-market returns earned by momentum investing is compensating for some risk not reflected in simpler asset pricing models? How would you tell the difference?...MORE
Previously:
Cliff Asness’s AQR Staff Built Him A Robot Warren Buffett (BRK.B)
AQR Capital's Cliff Asness on the Shiller P/E
Man vs. Machine on Wall Street: How Computers Beat the Market (and should they be banned?)
AQR’s Asness on ‘Smart Beta’: ‘Call a Bet a Bet’
UPDATED--Cliff Asness' AQR Capital: A Century of Evidence on Trend-Following Investing; Since 1903
UPDATE--More on "A Century of Evidence on Trend-Following Investing
AQR Capital Management LLC: A $100,000 Prize for Academic Papers in Finance
The Last Word On Asness' Alpha, Buffet's Beta and The Failure of Commodity Quants (and how to turn hyperlinks into footnotes)
Testing Small-batch Artisanal Portfolio Construction With Cliff Asness and Grantham, Mayo's James Montier
AQR--"Demystifying Managed Futures" (Returns and Anomalies)
...MORE
And on momentum:
Momentum As The Only Reliable Market Anomaly
Whoa! Has The Small-Cap Premium Disappeared? That Would Leave Only Momentum in the Tried-and-True Anomaly File!
Attention All Mo-mo Mamas: The Huge Hidden Downside Risk in Momentum Trading
Alpha Persistence & A Simple Momentum System For Beating the Market
