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The mounting deluge of mostly irrelevant information is overwhelming many investors, making financial markets more chaotic and less efficient at pricing in important data, says hedge fund magnate Clifford Asness.
The founder of US-based AQR Capital Management, still one of the world’s biggest computer-driven investment firms despite a sharp drop in assets in recent years, once studied under the University of Chicago’s Eugene Fama, who won a Nobel Prize for his efficient markets hypothesis.
But three decades of exposure to how markets work has eroded Asness’s belief in the theory.
“I probably think markets are more efficient than the average person does, long-term efficient, but I think they are probably less efficient than I thought 25 years ago,” Asness said in an interview with the Financial Times. “And they’ve probably gotten less efficient over my career.”
Fama’s theory was that the overall impact of countless investors and traders continually trying to beat the market meant that information got quickly baked into prices, making it hard to outperform markets.
Many investors and academics argue markets are becoming more efficient as information and analytics that was once unavailable or scarce becomes easily accessible to anyone online.
While the cost of a Bloomberg terminal or FactSet subscription remains prohibitive for many ordinary investors, there are many free or cheap alternatives that offer similar if lighter data and data-crunching capabilities.
Meanwhile, big money managers nowadays use artificial intelligence to sift through vast data sets such as real-time credit card sales and earnings call transcripts in a never-ending attempt to gain an edge over rivals.
However, Asness said that the availability of more data was actually making things harder for most investors, whether they were individuals trading at home or investment professionals at a large financial institution, and compared the belief that more information would make markets more efficient with early optimism about the impact of social media.
“The world assumes that because of things like the internet that the ubiquity and immediacy of all information has to make things more efficient. But that’s never been the hard part,” he said.
“The same people who think the ubiquity and immediacy of information must mean that prices are more accurate are the same people who 20 years ago thought that social media would make us like each other more.”
Five years ago AQR was one of the industry’s biggest hedge fund groups, before most of its systematic, model-driven strategies started to splutter. As a result, its assets under management have nosedived from a peak of $226bn in 2018 to $98bn.
Analysts dubbed the spell of dismal performance by AQR and many of its rivals as a “quant winter”, which undercut optimism over an approach that some industry insiders at one point thought would inevitably take over more and more of asset management.
However, most of AQR’s strategies have rebounded strongly since late 2020, even if that has yet to bring investors back. Its Absolute Return strategy — its oldest investment vehicle, which combines most of its myriad quantitative trading signals — returned 43.5 per cent after fees in 2022 and is up 19.4 per cent this year.
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