Billionaire hedge fund founder, Cliff Asness, has voiced concerns over conflicting signals from the stock and bond markets regarding future US inflation trends. Asness points out that, contrary to equities, the bond market implies that the Federal Reserve may implement aggressive interest rate cuts in the coming year or two, potentially triggering a significant recession. This scenario would leave equities as a "scary place", given they are not presently priced in alignment with bonds. However, Asness also notes the possibility of an "immaculate" disinflation, where inflation decreases without affecting economic growth.
Asness' firm, AQR Capital Management, had a successful run in 2022, with its longest-running strategy, Absolute Return, recording a 43.5% increase in value after fees. This was the best performance since the company's establishment, and a stark contrast to previous poor returns starting from 2018. AQR combines traditional value investing principles with a momentum trading strategy, an approach that Asness had previously defended during the strategy's rough patch. Asness attributes their recent success to sticking to their process amidst the chaos.
The interview further revealed Asness' academic background and his association with Eugene Fama, a Nobel laureate often referred to as "the father of modern empirical finance". He also spoke about the perceived risks and merits of private equity, sharing his view that while private equity investments can be beneficial, the reporting of risk and volatility often overlooks potential downfalls. This may result in investors realizing they have more equities than initially thought, particularly in the event of a prolonged bear market.
Asness also shared his views on the Federal Reserve's steady interest rate hikes, suggesting that the Fed had little choice but to adopt this approach due to lingering inflation. He further voiced his worries about the different perspectives stocks and bonds are portraying about the future economic situation. Towards the end of the interview, Asness provided what he believes to be the best investment advice he has ever received: "Stop looking at the screen. You’ll be a happier man
