Cliff Asness says market volatility is a good reason to diversify

Advisers should look at alts, but fees are too high, he contends.
OCT 17, 2014
The recent jolt in market volatility should be viewed as a return to normal, but that means it can get worse from here, according to Cliff Asness, founder, managing principal and chief investment officer at AQR Capital Management. Speaking Thursday in Chicago at the InvestmentNews Alternative Investments Conference, Mr. Asness stressed that volatility is the primary reason to diversify and that giving in to fear is never a good strategy. “I'm not saying things can't get worse, because to get to crazy volatility, you have to go through normal volatility, but what feels like a big event right now is really very different,” he said. “Volatility tends to means-revert, but it also tends to be sticky, meaning that when something is very volatile, your best guess for next month is that it will be more volatile.” With that in mind, Mr. Asness drove home the case for portfolio diversification well beyond just different areas of the equity markets. (Related read: Advisers on stock selloff: Keep calm, keep diversified) “Diversification is the one free lunch of investing, and when you see a free lunch, the only rational thing to do is eat,” he said. “And diversification means you will always have something in your portfolio that stinks.” A strong believer in risk-parity strategies that are designed to spread risk more evenly across multiple asset classes, Mr. Asness quipped, “If it's the right thing to do within reason and nobody else does it, you should get paid extra for that. That's why we think risk parity works.” He added: “Over the long term, it's about the money, not the Sharpe ratio, because you can't eat risk-adjusted returns.” A big part of Mr. Asness' diversification argument is allocating both to liquid and less-liquid alternative products and strategies. But that doesn't mean he is ready to give the general seal of approval to alternatives, especially in a market that recently has favored hedging some stock market risk. (Also: Why alternatives are a key piece of the investing puzzle) One rub against alternatives, he explained, is the higher level of fees. “Alternative investments should have positive expected returns and very low correlation to traditional assets,” he said. “And we think alternatives should be a part of more investors' portfolios, but unfortunately they are not.” One of the reasons investors and financial advisers have been reluctant to move into alternatives is fees, he said. “True alpha is usually worth a fairly large fee, but as a group, alternatives, including mutual funds, still charge too much,” he said. “There is some alpha, which should be charged for and there is some market exposure which should be charged very little for, but some mutual funds should charge lower fees because at some level they are suggesting it's all alpha that they are providing.” <>

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