Warren Buffett Exposes Hedge Funds

Name: Liying Pang (A15795924)

Class: Empirical Value Investing – B

Section: Wed. 1:15pm – 3:15pm

Instructor: Nusret Cakici

Video 1: Warren Buffett Exposes Hedge Funds

In this video, the main idea Warren Buffett, chairman and CEO of Berkshire Hathaway, wanted to tell investors is that hedge funds are not as efficient. The basic argument he held is that somebody could pick out five hedge funds and he would take the unmanaged S&P index used by Vanguard fund, over ten years, S&P index would definitely that 5 managed hedge funds. And then he showed some data for the hedge funds and S&P index over ten years to prove his idea. However, most of the investors do not believe this idea. They still pay a large amount of money to those managers since they just simply do not believe that they could have done much better than those professional managers by just sufficiently diversifying their portfolios.

Video 2: Clifford Asness: A brief and biased survey of quantitative investing

The second video is from the co-founder of AQR Capital Management, Clifford Asness. As the title of this video showed, this video is mainly talking about the quantitative investing. He demonstrated what is quant to us – investors, types of quants, and how we can apply it into our practice. Firstly, he introduced us what is quant. In the past, quant is more like a strategy growth and development of firms in 2007 and 2008. Currently quant has become challenges and opportunities for investors since we could do better off in investing if we could manipulate the quant method and build our model well. In the future, the importance of quant can be transformed more specifically into alternative beta, especially the “Smart Beta”. He emphasized the misunderstanding like “quant failed investors” since the investment always has risks and non-quant investing is even more unstable. To investors, quant is method which is very objective and disciplined, since people usually involve a lot of emotion into their investing behaviors. Also, we can manage risks very well – diversify the portfolios and limit unintended market exposure – by using quant.  Additionally, it is very efficient. Among all the different types of quant, he especially emphasized the quant equity which is using the Quantitative trading strategy. This strategy consists of trading strategies based on quantitative analysis, which rely on mathematical computations and number crunching to identify trading opportunities. Then Clifford talked about the goals of forming a quantitative model. In general, a good quantitative strategy is always productive and innovative even though the classic risks factors can never go away since the general investing environment is not changing. To be persistent, pervasive, dynamic, liquid and transparent is always what we should be looking for and try to achieve. Then the most importantly, alternative beta. Factors included “value”, if it is overvalued or not, the “momentum”, recent performance relative to the future performance, the “carry”, if the higher-yielding has high return, and also the “defensive”, if the lower risk and higher-quality assets are to generate higher risk-adjusted returns. Those are the “big four” concluded by AQR.