Cliff Asness' Talk at Capitalize For Kids Conference 2016

We're posting up notes from the Capitalize For Kids conference 2016.  Next up is Cliff Asness of AQR Capital who had a fireside chat on various finance topics.


Cliff Asness' Talk at Capitalize For Kids Conference 2016

•    Believes the role of hedge funds for a long time was to provide alpha and systematic strategies. Now there is generally not much value in the “hedge” aspect since many funds are correlated with the market

•    Regarding fees, thinks 2/20 is appropriate if you are able to isolate alpha (by hedging out beta using derivatives), essentially to make sure it is real market outperformance – however, true alpha is hard to find. Says the current fee structure is not sustainable for everyone.

•    Suggested two ideas for investment firms/allocators: have lower fees due to longer lockups periods which should better align all stakeholders. Secondly, with zero beta strategies management and performance fees that move inverse of correlation to the markets.

•    Sharpe Ratio: It a decent measure but not perfect. Believes it can generally add value to a portfolio if they are not correlated with markets.

•    Founded in late 1998 following tenure with Goldman Sachs. Initial focus was on systematic value however ran into difficulties as firm was essentially short expensive and long value. For AQR, capacity is a problem since liquidity is very important. They have closed strategies in the past.

•    Believes machine learning (AI) can disrupt anyone doing something with high frequency, generally thinks fundamental stock picking will continue to work.

•    Return distribution is quite “visible” in bonds. Limited returns since rates are so low.

•    Same with stocks since they are expensive. It’s tough to “buy at the 90th percentile and sell at the 99th”. Key is to find lots of uncorrelated assets


Be sure to check out the rest of the presentations from Capitalize For Kids/Sohn Canada Conference. 

Steve Cohen, Cliff Asness & Neil Chriss Talk Hedge Funds at Milken Institute

The Milken Institute just featured a conversation on the evolution of hedge funds and the future of asset management. The talk included Point72's Steve Cohen (formerly SAC Capital), Cliff Asness of AQR, and Neil Chriss of Hutchin Hill.

It's rare to hear directly from Cohen, so it's certainly worth watching the whole chat.  But here's some brief takeaways:

- Steve Cohen: says that there's so many players out there and they're all chasing the same names these days.  He was worried about levered/crowded names and becoming 'collateral damage' and you saw that play out earlier this year. "It's very hard to maximize returns and maximize assets too." He also noted that their data says their team are great stock pickers but not necessarily good at market timing.  In general, Cohen feels that talent is really thin.  He's "blown away" by the lack of true talent.  Later said around 80% of PMs come from inside their firm as they like to provide teaching tools.  "If you're not innovating, you're dying."  He says there's opportunities overseas but their offices there are always going to be smaller than the 'mothership' in the US.  They like to find people who have a strategy, stick to it, and do it over and over again (process).


- Cliff Asness: says that fees in the industry are just too high.  Gotta be more unique ways to structure fees, i.e. based on correlation of returns.  Barriers to entry for newer funds have gone up with increased regulatory environment (compliance, cost, etc).  Moderator says 67% of managers manage less than $250 million.  Asness notes hedge funds haven't performed well since the financial crisis and thinks they should be hedging more and be more uncorrelated to the indexes.  Also says the benchmark hedge funds compare to is simply wrong.  Noted that people overreacted to 3-5 year performance figures.


- Neil Chriss: argues that funds are too much like the indices but also too much like each other.  Says in order to scale in this business you need to be able to handle drawdowns and hire more people, expand into new investments, etc.  Made an interesting point that AUM from the 1990's until present has gone up something like 15-fold, but the talent level has not mirrored that expansion.  Thinks active managers will have more success when monetary policy stops influencing things so much.  On Hutchin Hill's multi-platform, they're looking for good decision makers, as that's ultimately what PMs are.  They want people with track records of good decision making.


Embedded below is the video of their Milken Institute talk:

Hedge Funds Short Neopost SA (NEO.PA)

Market Folly's coverage has expanded into tracking hedge fund positions in UK markets as well as in French markets. Upon digging in the latter's regulatory system, it's clear that four prominent hedge funds have been short Neopost SA traded on Euronext Paris (NEO.PA).

Hedge Funds Short Neopost


Steve Mandel's Lone Pine Capital has been short shares in its Lone Balsam, Lone Sequoia, Lone Spruce, and Lone Cypress investment vehicles. They crossed the threshold that required regulatory disclosure on January 11th, 2012 and revealed a net short position of -0.508% of Neopost's shares.

Cliff Asness' AQR Capital has disclosed a -0.995% short position in Neopost due to crossing the regulatory threshold on March 2nd, 2012. They've shorted it in various funds including their absolute return master account, multi-strategy fund, relative value fund and more. They've been short for a few months and this is a slight decrease in their position as they disclosed a -1.088% short on January 31st, 2012.

Ricky Sandler's Eminence Capital has disclosed a -0.895% short in Neopost due to crossing the threshold on January 3rd, 2012. They've also been short shares as far back as August 2011 when they were short 1.32% of the company's shares. Eminence's position has slowly decreased over the past eight months, though they still maintain a position.

Alan Fournier's Pennant Capital revealed their short position due to activity on October 19th, 2011 where they were short -0.72% of shares. A month prior in September, they were only short -0.5%.

The main takeaway here is that it's highly likely that most still maintain short positions in Neopost given that they have not filed disclosures indicating they've gone below the -0.5% short position threshold (they're required to file then).


Rationale For Shorting Neopost

The thesis behind shorting Neopost is largely a secular decline story. Many hedge funds have invested under the broad theme of transformation from print to digital. They go long the companies pioneering technology and short the companies whose products are in decline (and in some cases heading toward obsolescence).

The decline in traditional postal mail somewhat falls under this theme as fewer pages/documents are printed and mailed, instead being stored and transferred digitally.

U.S. First Class mail has seen a decline in volume of over 5% annually over the past four years. Not to mention, it's been in the news that the US Postal Service was potentially facing bankruptcy.

Per Google Finance, Neopost is "a France-based company engaged in the provision of solutions for the mailing and logistics sectors. The Company rents, leases and markets mailing equipment, document and logistics systems, and supplies customized mail processing solutions for letters and parcels to a range of customers in the corporate sector."

Neopost is the second largest provider of postage meters in the US, behind only Pitney Bowes (PBI). Given that physical mail is in secular decline, it should come as no surprise that some hedge funds in the past have disclosed put positions on PBI in their 13F filings with the SEC as well.

Neopost is going after PBI's business by releasing a lower-end postage meter for the US market. Competition in the industry as a whole is heating up as Stamps.com (STMP) offers e-postage as well.

Hedgies are willing to pay Neopost's 3.7% dividend (shorts must pay the dividend normally received by longs) because they believe gains from the decline in share price will more than outweigh these carrying costs. Shares of Neopost have largely traded in a range between €48-58 over the past six months (NEO.PA currently trades at €51.xx).

In summary, it seems hedge funds are betting against Neopost largely as a way to play the secular decline in physical mail.

AQR's Cliff Asness Explains Quant Strategies (Video)

Hat tip to our buddy @StockJockey for flagging this excellent video with Cliff Asness of hedge fund firm AQR Capital Management where he talks quantitative strategies. AQR has recently been also getting into the mutual fund business as they look to diversify their offerings.

Email (& possibly RSS) readers will need to come to the blog to view the embedded video: