Quantitative Fund Titan Cliff Asness says we have “surrendered more to the machine”

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Quantitative Group AQR Capital Management is using artificial intelligence and machine learning technologies to make transaction decisions, ending years of silence from one of the industry’s historic persistence.

Its founder Cliff Asness told the Financial Times that the Connecticut-based hedge fund managed $136 billion and that the fund “surrendered more machines.”

“When you hand over yourself to the machine, you obviously let the data say more,” he said.

All quantitative hedge funds (including two Sigmas, the AHL division of Man Group and Sir David Harding’s Winton) use computing power and algorithms to filter large amounts of data and then use complex models to make investment decisions.

However, AQR has previously been reluctant to eliminate humans from trading decisions, but instead favors rules-based computer models developed by humans to target interpretable market models.

Although the first investment in 2018 was based on a wide range of machine learning technologies, AQR has only recently expanded its strategy to other asset classes and is now using the technology to determine the weight given by different factors in the portfolio.

The fund also now uses machine learning algorithms to identify market patterns to bet, even in some cases it is not entirely clear why these patterns are developed. However, the company says it can find economic principles for deals in most cases.

Although this shift has become an improved return, the full embrace of machine learning may have disadvantages during periods of poor performance, as it is difficult to explain what is wrong to panicked investors.

Embracing machine learning makes companies “cloudy and complex boxes” rather than “black boxes,” Asness said. However, he admitted: “It was a very good time for us after a very bad time, and it was easy. It was hard to explain during a bad time (for investors), but we thought it was obviously worth it.”

Since the “quantitative winter” in 2018 to 2020, the rate of return has increased significantly. During a period of poorly operating hours of many investment factors, AQR's assets fell from $20.6 billion to a final low of about $98 billion in 2023.

“What drives me the most is the enemy who takes revenge on me,” Asnis joked. “I want to show the world that we are right and we can do better. There is a piece of my shoulder.”

According to people familiar with the numbers, the group’s top hedge fund strategy has performed well over the past five years, with multi-strategy top fund and equity strategy Delphi delivering annual net returns of 19% and 14.6% as of the end of May, respectively.

But other alternative investment strategies have also caused anger from Annis, including the private equity industry, he said, “usually intentionally defrauded”, large institutional investors such as pension funds and promise high and stable returns, “and God forbids retail to add it to their portfolios as well.”

He said the liquidity and irregular valuation of private equity portfolios have allowed executives to claim earnings more stable than those in public markets.

“There are a lot of BS out there,” he said. “The ability to not report returns…is a feature you pay for, which increases the price and lowers the returns.”

Asnis said the reporting gap is convenient for investors who want to avoid portfolios marked during a decline in the public market economy, but does not mean that private equity firms have a match for their perception of high returns and low risks.

As private equity groups have been working to uninstall portfolio companies – institutional investors and donors are increasingly reluctant to invest new funds into their funds, the acquisition company has sought retail investors as a new source of capital.

Asness said higher liquidity and more frequent valuations are so-called evergreen funds, and retail investors investing money could undermine the low risk of “fantasy.”

Democratizing access to private assets “In this world, they’re making transactions to retail are worse than the tough deals they’re bringing to institutional investors.”