How I Invest with David Weisburd
E162: Why Most Investors Quit Before Winning w/Cliff Asness
Fri, 09 May 2025
Cliff Asness is one of the most influential minds in quantitative investing and the Founder, Managing Principal and Chief Investment Officer at AQR Capital Management, which oversees over $100 billion in assets. In this wide-ranging conversation, we go deep into what makes a successful long-term strategy, how Cliff thinks about building portfolios, and why most investors misjudge both volatility and leverage. He also shares what it was like launching AQR after his early work on momentum strategies at Goldman Sachs, and what he’s learned about investor behavior across cycles. This is one of the most insightful and entertaining conversations we’ve had on the podcast—and Cliff brings both humor and hard-earned wisdom to the table.
Chapter 1: What makes a successful long-term investment strategy?
During our toughest period, rounds to zero, my concern about my personal losses in that, because I am a believer. I've seen this movie several times. I've stuck with our strategy and seen it work. Devising great strategies that have very decent, attractive, positive, sharp ratios that are uncorrelated. is only step one.
Step two is sticking with and convincing others to stick with those strategies long-term. 98% of it is when you manage money for others, you feel a responsibility. Bringing people bad news is no fun for anyone. I don't care who you are. And you're often dealing with very smart people who wanna do the right thing, but they face what are called agency problems.
This is a big part of what makes running an institutional portfolio really difficult.
Hedge funds, unlike any other asset class in the world, is literally a black box. And it's very mysterious to people. I was walking around your office here. There's 600 employees. Talk to me about how a strategy goes from a thesis to being tested, to being integrated into.
Today, I'm excited to welcome Cliff Asness, billionaire co-founder and CIO of AQR Capital, one of the largest quantitative hedge funds on the planet. Cliff is renowned for his pioneering research on factor investing, his outspoken takes on markets, and his willingness to question even the long-held industry beliefs.
In this episode, we dive into Cliff's approach to risk, why he believes the market is still inefficient, and how he balances cold rationality with the realities of client psychology. We'll also discuss building resilience through tough periods, the evolution of quant strategies, and what it really takes to stick with convection in the face of market pressure.
You've written about pulling the goalie as a finance metaphor for taking calculated risks. What did you mean by this metaphor?
In ice hockey, if you're losing with very little time left, it doesn't matter if you lose by two. It doesn't matter if you lose by three. Typically, at a normal point in the game, it's really important to have a goalie. If you took your goalie out... and put six skaters on instead of five, your chance of scoring goes up.
Myself and a colleague, Aaron Brown, wrote a paper trying to calculate what the optimal time to pull a goalie. We found they should be radically different than what the coaches do. They should be pulling the goalie five minutes before if they're down by one. If they're down by two, they should be pulling the goalie with 10 plus minutes left in the game, which I don't think I've ever done.
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Chapter 2: How do investors handle volatility and leverage?
You also want a world where it can be very tough to be an active manager occasionally.
You want this emotional market, but you don't want your clients to be emotional. You want your clients to be.
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Yes, the perfect world is a really, really emotional, downright silly market, and your clients are all Vulcans. It's hard to pull that one off.
So when you evaluate the strategy, you looked at the strategy that performed over 100 years but had three-year periods multiple times. Are these strategies that you don't pursue, or do you market them a certain way? How do you deal with that kind of trend?
Well, no, we certainly pursue quite a few of them. You try to put them together in a portfolio where hopefully there's some other parts that are not having that three-year period at the exact same time. At the end of the day,
if you're trying to do something at institutional scale, I do believe there are strategies and AQR doesn't really play in this world, but that we could also do that are much smaller in capacity that have much smaller bad periods that are effectively higher sharp ratio in the industry parlance. But if you're going to do something at industry,
at an institutional scale, I mean, tens, hundreds of billions of dollars taking decent amount of risk. I don't think there are, quote, two, three sharp ratio strategies at that scale. So even after putting a bunch of them together, you're going to have some periods that are quite difficult. So we try to deal with that probably in three ways. One is just pre-education.
Everyone will talk about this. It sounds very obvious and it is very obvious, but you got to do it. If you don't, I mean, I literally talk to a client and I'll show them that hundred year back test and those periods and I'll take them through. Let's just method act and imagine we're going through
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Chapter 3: What does 'pulling the goalie' mean in finance?
But when Goldman Sachs asked me to form a group and see if we could trade Goldman partners, initially Goldman partner money, and then client money with this, the first thing we did was use simple circa 19 or nineties. measures of value and momentum to go long a basket of global stocks and short a basket of global stocks where the longs were better than the shorts on these measures.
Some were much better on value and a little worse on momentum. Some were a little bit better on both. The portfolio was far better on both. We also very early on applied this to the macro world. saying, can you do this at the country level? If you lined up, say, 25 tradable countries and formed valuation and momentum measures, would it work? I'm cheating here.
It's a little like a cooking show where I already know the cake worked out in the back. So I'm taking you through the steps. I'm going to show you. It did hold up. None of these things work all the time, but it
So to unpack the intuition there, people have made money in the U.S. in the last few years, so more people will pile into that and they'll push up.
Right now, the U.S., it's starting to fade because the ex-U.S. is coming back. But for a long time, the U.S., on these two measures, and again, I haven't even gotten how much different things are today than 1994. But if you were just doing these two measures, the U.S. is probably a little bit of a push because it's looked expensive for a long time, but had really good momentum for a long time.
And if you put those things together, you get some intuition out of it. A lot of times, the smart thing to do in active trading is nothing. We don't have a strong signal here on one of the things we like.
But if it's really expensive and it starts to really look vulnerable, again, hopefully better than just six-month price momentum, over time you can improve those things, then might be the time to take a position. So for a long time, these things were kind of canceling out for the U.S. So imagine you're doing that around the world for individual stocks.
Those individual stock strategies are balanced in each country. So you're trying not to take a country bet, but then you do it for countries. And you say, if France is half the multiple of Germany, on average, France will win. Not all the time. These are risky bets, but on average, if France has started to better than Germany over the last six to 12 months, on average, France will win.
And if you have both of these things going for you, It's slightly better bet. You can do that for country stock indices, bond indices. You have to think about how to measure value. It's not just for country stock indices. You could just use the same exact measures. If you like price to sales, aggregate that up for the country. For bonds, it's not that complicated. You could use real bond yield.
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