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Cliff Asness: Rational strategies for a less efficient market

In his latest paper titled ‘The Less-Efficient Market Hypothesis’ AQR’s Cliff Asness explains why he believes markets have become less efficient over the past 30+ years due to technology, gamified trading, and social media.

This inefficiency raises the stakes for rational active investing, with bigger and longer-lasting market swings. Investors should embrace this opportunity but remain cautious of strategies that might not perform well long-term.

Asness stresses the importance of sticking with sound investment principles despite volatility. While indexing is a reasonable choice for some, active value and quality stock picking may offer better opportunities.

Here are the key takeaways:

  • Two major episodes of market inefficiency are highlighted: the dot-com bubble of 1999-2000 and the period around 2019-2020, where value spreads (the difference in valuation between expensive and cheap stocks) reached unprecedented levels.
  • Three hypotheses are proposed for this decrease in efficiency:
    • The rise of indexing
    • Prolonged periods of very low interest rates
    • The impact of technology, particularly social media and gamified trading platforms
  • Cliff believes the third hypothesis – the impact of technology – is the most significant factor contributing to market inefficiency.
  • This decrease in efficiency presents both opportunities and challenges for rational, value-based investors: Potentially higher long-term returns, but greater difficulty in sticking with strategies during periods of underperformance.
  • Many investors are responding to this by increasing allocation to index fund and investing more in private equity and private credit, which the author criticizes as “volatility laundering”
  • Cliff suggests investors should
    • maintain a long-term perspective
    • Focus on overall portfolio performance rather than individual line items.
    • Be more aggressive with diversifying strategies
    • Improve investment processes and diversify beyond traditional value strategies

Good investing has always been a challenge combining a) discerning what is right, and b) sticking with what is right. Both have always been vital and both still are. But if markets are indeed “less efficient” the first task has actually gotten easier and the second harder — and the skills needed to pursue good investing have shifted. That tells us what we should work on going forward.

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The above has been prepared by Børsgade ApS for information purposes and cannot be regarded as a solicitation or recommendation to buy or sell any security. Nor can the information etc. be regarded as recommendations or advice of a legal, accounting or tax nature. Børsgade cannot be held liable for losses caused by customers’/users’ actions – or lack thereof – based on the information in the above. We have made every effort to ensure that the information in the above is complete and accurate, but cannot guarantee this and accept no liability for errors or omissions.

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