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Asness: Obama Got It Terribly Wrong

Scott Burns

Scott Burns: Hello there. I'm Scott Burns, director of ETF analysis with Morningstar. Today I'm joined by Cliff Asness with AQR Capital. We are going to talk a little bit about the hedge fund industry and some things that are going on. Cliff, thanks for joining me.

Cliff Asness: Thank you.

Scott Burns: Recently, you have had a letter, you have gained a little bit of notoriety that went a little viral, something you were working on that I think kind of expressed what a lot of people on Wall Street are thinking, a lot of people in the demonized hedge fund industry.

It was just talking about the position that money managers are being put in in this situation right now. And I don't think it is just hedge fund managers it is banks, it is a lot of people, it is research folks; it comes everywhere, where what the government deems is good is contractually or morally conflicting.

Cliff Asness: Both contractually and morally. Let me talk about it for a second. I am having probably less than 15 minutes, but my 15 minutes of fame is going on right now because I wrote this letter that I had not finished. I sent it to a few friends for comments, and then it went viral and got all over the Internet. You look at it, and you go, "Oh, my God, these are terrible sentences." I never got to edit it, and it is too late. It is out there.

But it was about the specific situation in Chrysler, where Chrysler is effectively entering bankruptcy. The government and the President have put together a plan that kind of circumvents bankruptcy. It is kind of bankruptcy quick and fast.

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A number of the bondholders, not all, but including some hedge funds, said this plan is not fair enough to the bondholders and is too fair to the unions. The bondholders exercised what is their right to say no to the plan to go into bankruptcy court where they might end up being right or wrong.

They were rather savagely attacked by the President as speculators not making the sacrifice we all have to make. I am part of a bunch of people who do make sacrifices.

I know a lot of hedge fund people who have upped, for instance, their charitable contributions in years when they are making, they are still doing pretty well don't cry for them, but in years that they are making a lot less, but you are not allowed to sacrifice your client's money without their permission.

If I tell my client, and we were not involved in Chrysler, I was an observer, maybe that made it easier for me to write the letter in some ways, but if you tell your client, "Yeah, we sacrificed a bunch of your money and we gave it to the UAW because we thought it was a nice thing," they will not be happy with you. They could and should sue you. Your job is to protect their interests. If you want to be charitable, you do it with your own money.

Scott Burns: I think it is important to know who the clients of hedge funds are a lot of times, too.

Cliff Asness: Absolutely. Again, I don't want to paint it out as the hedge funds are Robin Hood just trying to help everyone. No one is going to buy that anyway, although it is a great charity. The hedge funds run money for some of the world's biggest pension funds, unionized and non unionized, charitable endowments. Ultimately, much more than it was 10 or 15 years ago, a lot of the money ends up being for regular people, not for the ultra rich.

So, these are people who are handed the money of a pension fund and told, "Do as best you can with it." What we are not allowed to do is spend it on what we think is a good cause that costs our clients money. That is their job to be charitable.

So the President's motive might have been on the side of the angels. He might have really been trying to do something right, but I think what he ended up doing was something terribly wrong. He threw gasoline on a fire and really yelled at hedge funds in a very castigating way when they were doing what they precisely had to be doing.

Scott Burns: In the long run, what is going to be the real risk to this kind of uncertainty and, I would say, lack of fair play, by your estimation?

Cliff Asness: I am hoping it fixes itself. I don't think my letter, I'll be honest, was particularly great. I think I got lucky. I think I hit a feeling, a vein going out there of people on Wall Street who, if they are rational, will absolutely say, "We were part of the problem." But they will also say, "government and consumers going wild were part of the problem, " and the Wall Streeters and the hedge fund people will say, "But we are the only ones who are publicly being blamed."

And I think more people speaking out on that, making sure we understand that it is a shared burden, and to use the President's language, a shared sacrifice going forward. I do not think they are long term.

I think we are too good of a country and too good of a system to have hating hedge funds, hating success if you will, to be the long term new norm, but it does feel that way now, and I think people should speak out about it.

Scott Burns: Well, thanks for your time, Cliff. I am Scott Burns with Morningstar. Thanks for watching.