Cliff Asness, founder of hedge fund AQR Capital Management, doesn’t think hedge funds hedge enough.
In an interview with Stephanie Ruhle on Bloomberg TV on Monday, Asness spoke about the fee structure of hedge funds, and whether these funds really deliver the performance — or the hedge — that they advertise.
Asness said hedge funds aren’t, “diversifying as they should be… So I will tell you, I think hedge funds don’t hedge enough… They don’t fully hedge, which makes them less of a diversifier and less of a good deal.”
Asness sees a “properly run hedge fund” as one that is about as long the market as it is short, but most hedge funds end up being mostly long the market and perform like an expensive index fund.
“[P]art of what you’re paying for is their high fees for index fund exposure,” Asness said. “You’re paying 2 and 20 for Jack Bogle. Two and 20 can be worth it for something very special. It’s not worth it, as much as I love Jack, for Jack.”
Jack Bogle, the founder of low-cost index company Vanguard, appeared on stage with Asness on Monday at the Bloomberg Markets Most Influential Summit.
Vanguard offers some of the lowest cost funds on the market, including a management fee of 0.05% for its S&P 500 fund, compared with the hedge fund industry standard of a 2% fee for all money under management and a 20% fee on all profits.
Asness co-wrote a paper with his partner Jack Liew back in 2001 titled, “Do Hedge Funds Hedge?” that found: not really. But on Monday, Asness sort of, well, hedged his statement.
Ruhle asked Asness about the recent news that CalPERS would pull its money from hedge funds, and Asness said that he sees “more of CalPERS’ side… than the average hedge fund manager,” perhaps the hate on the industry had gone too far. “I’m thinking of writing a second [paper], and I probably will, called ‘Hedge Funds: The Defence’,” Asness said.
Asness said that generally, he sees “2 and 20” as too expensive, but there are exceptions.
If a manager is twice as aggressive with your money, Asness said that would at least justify the 2% fee on money under management, as they would be able to manage half the amount of other people’s money. And Asness added that of course there are also managers who do outperform, who do generate real alpha, and these folks are worth “2 and 20.”
“I do think they have some managers out there who I would bet on going forward,” Asness said. “Two and 20 can be justified if you believe you’ve found one. It’s usually not. It’s usually not the smart thing to say.”
Asness also talks with Ruhle about private equity and “smart beta” (Asness published paper titled “Smart Beta: Not New, Not Beta, Still Awesome“), among other topics.
The whole interview is embedded below, and is well-worth watching for some animated thoughts from one of the most interesting thinkers in the market.