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Continued from previous page
An Epiphany at Wharton
Self-described as a somewhat "disinterested" student in high
school, Asness had always thought he would follow his father
into law. Instead, Asness found a new passion for numbers
ignited by his Wharton experience. As an undergraduate, he
double-majored in finance at Wharton and computer science
at Penn Engineering as part of the Management
and Technology program, finishing the typically
five-year program in only four years and graduating
summa cum laude.
Working as a research assistant in the Finance
Department, Asness discovered an interest and affinity
for research in finance, specifically in portfolio
management, which led him to follow in his
mentors' footsteps and pursue a PhD in the discipline.
After Wharton, Asness went straight to graduate
school at the University of Chicago. There, he
became a teaching assistant for Eugene Fama and
wrote his PhD dissertation on the performance of
momentum trading, buying stocks with rising prices.
Years later, Asness would combine the insights
from his research with those from his mentors to
make money in the financial markets.
After Chicago, Goldman Sachs offered Asness
the chance to start a quantitative strategies group
to use the latest research to make money in the
financial markets. Asness accepted. Asness's group
delivered high returns in their first few years,
even doubling their money in one year. After
only two years, Asness's team was already managing $7 billion,
and they barely had a month in which they lost money.
In November 1997, Asness decided to leave Goldman and
start his own hedge fund, rebuilding his computer models
with three other founding partners. Asness and his team had
no trouble attracting investors for their fund, AQR. Within
five months of launching AQR they raised $1 billion, which
was believed to be the largest amount ever raised by a startup
hedge fund at the time, according to the New York Times.
Today, Asness and his team make money by continuing to apply
the latest financial research to finding and capitalizing on
inefficiencies in financial markets around the world.
For a man who relies on hard numbers to make financial
decisions, Asness surprisingly attributes much of his success
to good fortune. "I don't think enough people who are
successful give enough honest credit to luck along the way,"
he said. For example, he almost became a lawyer and would
never have considered a career in finance had it not been for
his pivotal experiences at Wharton.
Investment Philosophy
AQR's core investment philosophy is the combination of value
and momentum investing: buy value stocks with positive
price momentum and sell short growth stocks with negative
momentum. AQR's strategy combines the insights of Asness's
research on momentum trading with principles
of value investing. In a famous study, Fama and
his colleague Kenneth French found that value
stocks outperformed growth stocks more than
half the time (in fact, in more than two-thirds
of the years), which is more often than expected
under the Efficient Market Hypothesis (EMH).
(The EMH states that investors cannot beat
the stock market consistently because all relevant
information is already built into stock prices.)
Asness further tested the EMH by studying
the performance of momentum trading, buying
stocks with rising prices. He found that momentum
trading also worked better than the
EMH suggested it would.
Today, AQR applies its strategy of buying
undervalued assets and shorting overvalued
ones not only in the stock market but in
19 other financial markets as well. The key to
the strategy's success, says Asness, is accurately
and clearly defining value and momentum. To implement
his firm's quantitative investing strategy, Asness and his team
develop and "apply statistical models through giant computer
programs to try to make money in the investing field."
AQR is also widely diversified, usually buying and selling
blocks of 400 stocks at a time. The company buys the
400 most undervalued and sells short the 400 most overpriced.
As Asness describes, "We are about the ideas of value
and momentum and a few other things paying off over time
and how to insulate ourselves as much as possible from the
vagaries of any one company. A traditional [fund] manager
is much more about, 'How do I get the vagaries of any one
company right.'"
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