rogernusbaum

In case you missed it yesterday there was a fun Twitter war between Nassim Taleb and Clifford Asness who runs AQR which is a quant shop that manages funds that offer alternative strategies, some of which can be accessed through traditional mutual funds.

In trying to piece it together, it looks like Taleb got the ball rolling shortly after the equity market opened on Wednesday noting that AQR issued a report that tail risk hedging does not work because from AQR's research, the options are too expensive. Taleb has obviously written a lot about tail risk and how to hedge it and has aligned himself as a technical advisor with Universa which has a successful track record for tail risk hedging.

The simple definition of tail risk hedging is buying out of the money put options repeatedly in the expectation that whenever the next market panic happens the puts will skyrocket in value. Market panics don't happen very often of course so most of the puts expire worthless if held to expiration. T-bill interest might offset some of the portfolio erosion caused by puts expiring worthless. We took a look at Universa in more detail last month when its returns were wildly successful.

Taleb then proceeded to attack AQR's research with math and insults. Asness did not start to reply until after the market's close. He said he knew about Taleb's thread and was going to ignore it but after five Tweets, out of 12 (and counting?) from Taleb, Asness weighed in and tore in to Taleb including saying "getting famous and rich for saying “bad shit happens sometimes” and then screaming “see” when it luckily does soon after, even though you’ve lost all the money many times, and then using that pulpit to slander and abuse people is gross."

In the back and forth Taleb noted that he was going after AQR, the firm, not Cliff personally and wondered why Asness was not rebutting Taleb with math. I would encourage taking a look at both of their threads, it was entertaining and despite the fighting, there are also some interesting ideas kicked around too.

Cullen Roche isolated the possible apples to oranges of the Twitter war because tail risk hedging is insurance while risk parity is more of an allocation strategy. I think AQR is most known for risk parity which is another strategy we've looked at quite a few times. There is a risk parity ETF that trades with symbol RPAR. It hasn't been around very long, YTD it's chart looks like the S&P 500 in that they went down at the same time but nowhere near the same magnitude and Yahoo Finance has RPAR up 2% for the year versus down 8% for the S&P 500.

I have always struggled with risk parity because it leverages up to buy bonds to balance out the risk from its equity exposure which seems like risky positioning if rates ever go up again.

One thing that is true is that AQR's mutual funds' performance has generally been poor. The AQR Risk Parity II Fund (QRMIX) has had a bad 2020. It lagged behind RPAR by a small amount before the world ended, no big deal, it dropped in a similar fashion to RPAR, so nowhere near what the S&P 500 dropped but QRMIX never came back up like RPAR which leaves QRMIX down 7%, again this is all from Yahoo Finance.

It is possible that what AQR does process-wise doesn't lend itself to the constraints imposed by the mutual fund wrapper, I don't know. I've looked at AQR products many times over the years and just could never get comfortable with an allocation.

That doesn't mean there isn't a lot to learn from Asness or any content put out by AQR. I do read their stuff, it is challenging and I learn from it.

Similarly, I've learned a lot from Taleb's writings/interviews too. I've mentioned before that Taleb has evolved to a point where there is a lot to sift through to find ideas and concepts useful to what I am trying to do and learn. To Cullen's point, they bring different things to the table.

It makes sense to bring up John Hussman here too. He does a phenomenal job of framing the prevailing bear case. Despite his ability to do so, his funds' track records have been brutally bad save for a couple of top quartile years here and there. I've learned a ton from Hussman over the years, it just seems like something gets lost between this is what can go wrong and why and how the funds are implemented.

This all adds up to a phrase that I think I coined many years ago which is to take bit of process from various sources to create your own process. All three are much smarter than I could hope to be and select insights from them over the years have helped me get better at my job.

So enjoy the Twitter fight for however long it lasts and know you can still learn a lot from the fighters.

Comments (5)