Fitting Factors Into the Formula

Found via Mebane Faber.

For this issue’s Morningstar Conversation, we talk with two quant-investing legends— Cliff Asness, co-founder of AQR Capital Management, and Robert Arnott, chairman of Research Affiliates—to gain insights on where academic theory is being practically applied in the marketplace. AQR, a hedge fund shop, recently rolled out a suite of factor-exploiting products in the mutual fund arena. Gone are the days of 2-and-20 fees for access to exotic betas a la carte. Research Affiliates, through its subadvisory of PIMCO All Asset PAAIX and its Fundamental Indexing concepts, has taken active quant investing to the masses (with strong performance, to boot).

While both of these investors are renowned in both academic and practitioner circles for their cutting-edge work in quantitative analysis, they haven’t always seen eye to eye. In this conversation, we focus not on where the disagreements reside, but instead on where there is common ground. The result is some sage advice on how investors can assess and implement factor-based investing strategies today. Our discussion took place Aug. 21. It has been edited for clarity and length.