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Best Alternatives Keep It Simple

Christine Benz

Christine Benz: Hi, I'm Christine Benz from Morningstar. I'm here at the Morningstar Ibbotson Conference with Cliff Asness. Cliff is managing principal for AQR Capital Management. Cliff, thanks for being here today.

Cliff Asness: Absolutely. Thank you.

Benz: Cliff, I have to say I tend to be a skeptic on the concept of alternative strategies, mainly because I favor really low maintenance, hands-off, simple portfolios for investors. Can you talk about why you think alternatives should fulfill at least a small slice of many investors' portfolios?

Asness: Sure. That's something we agree on. I've written a lot on this. I've been quoted on this. One of my favorite quotes is comparing investing to dieting. People write giant diet books. You have a camera here, so I can't brag that I'm particularly good at dieting, but we know the answer. It's exercise more and eat less. But nobody writes a book, nobody gets rich, doing that. In investing, it's stay diversified, keep fees low, be tax aware, don't chase returns, don't chase the hot thing. I'm a big believer in keeping it simple.

In the alternative world, what we think, and again, our firm has written a whole bunch of papers in this direction, is there are some really good, really value-added strategies that alternative managers do, ones that are economically explainable, that are not risk-free like some managers sell them at. They take some risk, but there's a reason they get paid.

But if you look at the whole world of alternatives, and particularly hedge funds, which is the part I'm talking about, they do over-complicate things. They do a lot of trading, and a lot of very high fee things, and a lot of opacity, and things they don't tell you.

The cynic in me wants to say it's because if you do something simple, it's very hard to charge two and twenty for it. If you do something complicated that looks like magic, then suddenly you can.

So we do think hedge funds have a role, but it's very much in the direction of what you're talking about. It's keeping the strategies simple, transparent, and at a reasonable fee. If you do all that, we think it would be an institutional or an individual investor, we think they have a role.

But it's precisely in the direction you're talking about. It's keeping it simple, not over complicating it and overcharging for it.