Cliff Asness: How we avoid the pitfalls of traditional long-only active management

In this interview with Bloomberg, Cliff Asness discusses the challenges of investing in a market dominated by a few, highly concentrated stocks like Mag Seven.

As a quant, he emphasizes the benefits of diversified long-short portfolios, which typically balance around 750 long and 750 short positions across industries. This approach avoids excessive exposure to concentrated stocks and mitigates risks associated with benchmark constraints.

Asness highlights the diminishing importance of active management in such markets, where key insights often lie in figuring out what not own. By focusing on preferences and avoiding concentration issues, his strategy avoids the pitfalls of traditional long-only active management.

Here is an excerpt from the interview:

Asness: Well, first of all, it’s a lot easier to be a quant in these times. We do run some traditional portfolios, but a lot of what we do is long and short portfolio. It is common for us to take long positions on around 750 stocks and short positions on around 750 stocks around the world, depending on the industry. So we take the courage and run away from this problem.

We have had very good years with a rapid rise in Mag Seven, even if value strategies are part of our activities. The opposite hadn’t happened in a long time. The opposite could happen.

Concentration is sometimes a problem for a typical active manager and for us when you are only allowed to take long positions against the benchmark. If you’re a good active manager, a lot of your information will be about what not to own. When some things are so concentrated and large, everything else shrinks and makes that information less relevant.

If you have long, short, or even a traditional portfolio that allows you to do a little short selling, you don’t have to think much about the Mag Seven if that really goes away. You just need to think about what you like and what you don’t like.

So I’m mostly running away from this problem.

You can watch the entire interview here:

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