You can learn more from the tone of this article, actually, than you can from anything within its content. Because while the writer takes some stabs at being skeptical, the general attitude towards these hedge fund types is still one of deference and respect, rather than treating them as they deserve to be treated, like your drunk uncle at a craps table at the Bellagio. There's a lot of reasons why we seem simply incapable of reforming our financial institutions ("they've got the money" being numero uno), but the media's seemingly inexhaustible appetite for treating these people like geniuses, in spite of all evidence to the contrary, goes a long way.
The charming subject of this story is the brave new world of "quant" investing, where computers determine whether large swaths of stocks are undervalued or overvalued and buy and sell accordingly. I know what you're thinking: what could possibly go wrong? I agree, and I can certainly think of no recent history that might make me worried about this brilliant scheme! The subject of the personal profile in this piece is a Galtian overlord named Cliff Asness. (Remember that all magazine journalism about complex phenomena now has to be written like a celebrity puff profile; understanding stuff is just too hard unless you tell it like a fun little story about a real person you can get to know! Thanks, Michael Lewis.) Asness is right out of central casting: rich, entitled, and contemptuous of government and bailouts even though he was, er, bailed out:
Asness abhors the idea of increased quant regulation. With some reluctance--given the vitriol with which he typically condemns Washington on his blog--Asness conceded that the government bailouts in September and October 2008 saved AQR by rescuing the firms with which AQR trades, an outcome at odds with his Chicago-school economic training, which champions Milton Friedman, free markets, and the survival of the fittest. The bailouts "saved any levered fund's bacon," he said. (Of the $33 billion that AQR currently manages, $13 billion is in levered funds, which use borrowed money to increase returns on the equity invested.) Nevertheless, he remains unapologetically critical of the bailouts. He thinks the government should have let the banks fail and the chips fall where they would.What a brave, brave stance. Now, you'll find that the article talks about Asness with a story the media loves to tell. He is described as the classic underachieving but brilliant kid who never wanted to do the hard work but got by on his big brain and gumption and sassiness and whatever. And he saw something that nobody else saw, and he decided to stick it to the man at the big firm and go rogue and make his own fortune, and blah blah blah blah.... How many times have we heard this story before?
But I know what you're thinking; this guy's rich! He must have some long history of success to be eligible for such hagiography from the august Atlantic. Here you go.
As it happened, AQR had started just months before Long-Term Capital blew up (and needed to be rescued), and in the midst of the Internet bubble, when anything related to the Web seemed to double or triple in price overnight. It was a world of irrational momentum, an environment that could not have been worse for Asness's investing style. In 1999, AQR owned a bunch of seemingly undervalued stocks, in businesses like banking and manufacturing, while holding short positions on seemingly overpriced tech stocks. The firm was getting killed, bringing to mind Keynes's famous observation that the market "can stay irrational longer than you can stay solvent."If your great accomplishment over eight years is "reducing the threat to your firm's very existence," you sure sound like the kind of Wall Street wizard we all want determining the future of our economy, am I right? What a record of proven results! You'll also note a really important part of how we the media talks about the markets: still, despite it all, irrationality in the markets is seen as some unusual and temporary phenomenon. There's no consideration here that the Internet bubble could be the expression of the market's fundamental tendency to an ever-more-violent bubble and bust cycle.
Within AQR's first 20 months, its $1 billion fund was reduced to $400 million. The firm was near complete collapse, but Asness fought hard to keep it alive. He added to his value investments as the bubble inflated and kept his short positions in place, with the hope that he could capitalize when it popped. He met repeatedly with investors, and argued that he would be proved correct once the hysteria subsided. And indeed, things soon turned around. From 2000 to 2002, in a bear market, AQR "made a ton of money," Asness said, and then for the next few years "made decent money" in a generally bull market. The firm nearly lost it all again in the August 2007 fiasco, and suffered along with everyone else during the financial crisis the following year. But because AQR was now more diversified--with products ranging from mutual funds for small investors to a variety of funds available only to sophisticated institutional investors--the threat to its existence was not nearly what it had been in 1999.
Here's the part where I get really mad, though.
Such losses can be fatal for fund managers like AQR, since sophisticated investors pay them big fees for exceptional performance and, understandably, have little patience for anything less. As AQR's founders felt the tremors from Wall Street rippling through their offices, Asness said, "we worried about the stability of the financial sector, the stability of the economy, and the stability of society." To Bloomberg Markets magazine, last fall, he was even more explicit: "I heard the Valkyries circling. I saw the Grim Reaper at my door."It's demonstrably untrue that these big time financial types live on the razor's edge of risk. That's a totally discredited notion, but one that persists. There are seemingly no consequences for people working in Wall Street. No matter how much damage they do, or how complicit they are in actions that wreak havoc on our economy and cause massive human suffering, they always fall upward. The word that really bothers me here is "survived." Now, I've never been the editor at a fancy magazine, but I'd like to think that one thing any editors can agree on is that words have meaning. And in this context, where so many Americans have been in situations where they might worry about Valkyries and the Grim Reaper, this is pretty inexcusable. Asness is described in the piece as having a personal fortune of $500 million. That's not surviving.
Yet they survived.
So this is the hot new investing mechanism, and it's where billions of dollars are going, and it's insufficiently regulated, and the people pushing it all have a stake in the game, and nobody is 100% sure if it will really work in the long run, and the interested parties have too much money for our political process to be able to rein it all in. It's just business as usual. You don't have to be Trotsky to look at our society and see that our relationship with the financial class is terribly and permanently broken. We are incapable of disciplining these people. There's apparently no series of events that can compel change in this arena. And so the boat we're all on together hurtles down the river.