During this interview with Masters in Business, Cliff Asness discusses the role of luck in investing. His fortunate position of being involved in both the traditional long-only and long/short investment worlds. He also highlights the tax efficiency gained by separating an active stock portfolio into an index fund and a long/short portfolio. Here’s an excerpt from the interview:
Asness: Here again we got lucky. We got lucky in that we ready were involved in both the traditional long only world and the long/short world.
And it turns out that first the very act… imagine you have an active, beat the benchmark traditional stock portfolio.
Now imagine you separate that into an index fund and a long short portfolio, and just for the sake of this argument imagine if you add those two together you get back to the original.
The long/short is the over and the underweights that you had before. Just that act of separation makes something far more tax efficient.
The index fund accrues. Like all index funds are fairly tax efficient. And the active part you only pay tax if you make money.
You have a bad year you don’t pay tax on it.
In a traditional long only portfolio imagine markets they do go up on average over time and you want to sell something that you actually haven’t produced alpha in, and you just don’t like the stock anymore, you get a tax hit from that.
So simply the separation gets far more efficient. Then you say well can I do any better about this.
And here, this the last time I’ll try to mention luck not again. This will be the last time I’ll mention luck.
But the average turnover of our stock selection models. And this was not by design. This is why it’s luck. It’s about a year.
You know what averages mean, some things are fairly quick some things we own for five years, but average is about a year.
A year is a magic number in stock… a year and a day. Right, you know you have a big winner at eleven and a half months, you’re kind of an idiot if you sell it right.
Unless you have illegal inside information, wait two weeks and a day, it turns out that in a long/short portfolio with approx… with not tremendous turnover, but decent turnover in an average kind of one-year holding period, there’s a tremendous amount of optimization around that you can do.
You can watch the entire discussion here:
