Cliff AsnessNo black swans here.
That's the opinion of hedge fund manager Cliff Asness, who runs AQR Capital, which is one of the industry's biggest firms with $80 billion under management. The rapid move up in interest rates and the recent 800-point two-day drop in the Dow Jones industrial average (INDU) has more than a few investors worried we might be seeing the beginning stages of a new economic crisis.
Adding to the anxiety is the fact that all this seems to be triggered by Ben Bernanke's suggestion that the Fed may soon curtail its bond buying stimulus program, which some have been warning would spell doom.
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Asness's advice: Chill out. The investor says the effect of the Fed on the market has been exaggerated. He expects the recent combined rout of stocks and bonds to be over for now. "There is absolutely no reason for this to continue," says Asness. "There is no liquidity crisis or big unwind. This is not 2008."
Some have said that the market is suffering from excess leverage or the fact that Wall Street dealers, because of new rules, are no longer willing to support the bond market. Asness says he sees no evidence of that. He says some bond market are less liquid than usual, but he sees no signs of the type of market turmoil we saw brewing back in 2008. "Markets are functioning well," says Asness.
What has caught the market off guard, according to Asness, is that interest rates are rising at a time when inflation is flat, expectations for corporate cash flows haven't dramatically improved, and commodity prices are falling. That's not what normally happens. What's more, this is all coming at a time when China is slowing as well. "Sounds like a perfect storm," says Asness.
That's not sustainable. In Asness's opinion, either interest rates have to head back down, or growth has to pick up. Either way, investors should benefit. "The preponderance of evidence right now suggests a return to more a normal market environment," says Asness. "I would bet on that, and I am with my own money."
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Asness would probably like to get back to a normal as quickly as possible. Although it's hard to know how AQR has performed recently overall -- hedge funds don't have to disclose their performance to anyone other than their investors, and Asness isn't saying -- a number of his publicly trading mutual funds have suffered in the recent market rout. The most notable is AQR's popular Risk Parity fund (AQRIX), which has $1.2 billion in assets and tumbled 10% in the past month. It's now down 5.7% in 2013.
Indeed, the recent market downturn has taken some of the allure off of risk parity funds in general, which Buzzfeed recent touted as the the Steve Carell of investment strategies, which I think was a compliment.
Most of us usually think of diversification as combining some risky assets and some less risky assets. The idea behind risk parity funds is that's silly. What you really need to do is take some risky assets and some non-risky assets, and then leverage up those non-risky assets so everything is just the same amount of risk, i.e. parity. That worked pretty well for a while, until recently, when it hasn't. The All Weather fund, which is the $70 billion risk parity fund of Bridgewater Associates, another large hedge fund firm, is also down 8% this year.
Asness says he is not as worried as some about the end of the Fed's quantitative easing. He says he is "shockingly agnostic" about whether the stimulus effort was good or bad for the economy. "Monetary policy is like a dog chasing a car," says Asness. "Central bankers are always behind, and then not quite sure what to do when they catch up. It's just paper chasing paper."
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