Markets are in a phony phase.
Or more phony than usual, according to quant-investing great Cliff Asness, in a new research/opinion paper that fingers social media as the main anti-efficiency device.
The founder of pioneering quantitative investment fund, AQR, says markets have become less efficient over the course of his almost 35-year career as measured by the ‘value spread’ between the most-expensive and cheapest stocks.
“Market efficiency is a central issue in asset pricing and investment management, but while the level of efficiency is often debated, changes in that level are relatively absent from the discussion,” Asness says in the paper. “I argue that over the past 30+ years markets have become less informationally efficient in the relative pricing of common stocks, particularly over medium horizons.”
And while the paper cites both the rise of indexing and the recent decade of super-low interest rates as possible factors in turning investors “cray-cray”, he says online herding behaviour has probably done the most damage to the efficient market hypothesis.
“… has there ever been a better vehicle for turning a wise, independent crowd into a coordinated clueless even dangerous mob than social media? Instantaneous, gamified, cheap, 24-hour trading now including ‘one-day funds’… on your smartphone after getting all your biases reinforced by exhortations on social media from randos and grifters with vaguely not-safe-for-work (NSFW) pseudonyms filtered and delivered to you by those companies’ algorithms which famously push people to further and further extremes,” Asness asks.
“What could possibly go wrong?”
The paper also takes a swipe at the private markets trend, arguing the wholesale flood of money into illiquid, rarely valued assets amounts to ‘volatility laundering’.
“… hiding from volatility can work when you are one of the few hiding, but when everyone is trying to hide in the same place you likely pay for it, perhaps dearly,” Asness says.
“… Let the beatings of Cliff by clients and competitors alike commence. But I stand by my comments, and paraphrasing Churchill once more, this time when it comes to privates, ‘never have so many paid so much to so few for the privilege of being told so little’.”
But as TikTok and whatnot continue to scale markets to irrational heights, the paper says “old-school active and value stock picking” investors stand to benefit more… if they have the patience.
Asness says the tech-driven trend has “raised the stakes of rational active investing”.
“Good investing has always been a challenge combining a) discerning what is right, and b) sticking with what is right. Both have always been vital and both still are. But if markets are indeed ‘less efficient’ the first task has actually gotten easier and the second harder — and the skills needed to pursue good investing have shifted.”
“… I think the ups and downs will be bigger and last longer, making more money for those who can stick with it long term, but making it harder to do so,” he says. “That seems fair to me. I think some investors should lean into it taking advantage of this larger opportunity than in the past…”
Everyone else should probably just phone it in.
“… indexing is a perfectly reasonable option for those who know they can’t do it.”
AQR manages about US$110 billion, down from its 2018 peak of US$226 billion, including almost NZ$4 billion for the NZ Superannuation Fund. Last year the two Annuitas-managed vehicles – the Government Superannuation Fund and the National Provident Fund dropped AQR as an underlying manager.