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In his September 2024 paper “The Inefficient Market Hypothesis,” Cliff Asness reports that financial markets have become less efficient over the past 30 years. Mr. Asnes, a former student of Eugene Fama, challenges the traditional efficient market hypothesis (EMH) and suggests that markets are currently becoming less informationally efficient, especially in the medium term. This increased inefficiency, he argues, causes more stocks to drift away from their fundamental values and take longer to correct. As a result, value investing may still perform well over time, but its “long term” is now even longer than it used to be.
Asnes identifies three key factors that cause this efficiency loss. It focuses on the advancement of technology – the rise of social media. Gamification of trading. and easier access to financial markets. Social media accelerates the spread of market sentiment and introduces volatility that undermines rational pricing. He reports that these factors amplify price volatility, causing stock movements to be based on speculation and hype rather than fundamentals.
Asnes’ company, AQR Capital Management, has experienced ups and downs in its positive operating performance. AQR, once one of the largest hedge funds with a peak of $226 billion in 2018, saw its assets under management halve as the performance of its systematic strategies declined. However, investment performance has rebounded significantly over the past two years, with the flagship absolute return strategy delivering a 44% net return in 2022 and a 19% net return in 2023.
Morningstar data reflects the mixed results of active management. Only 29% of active funds outperformed passive funds in the 10 years to June 2024, but 51% of active funds outperformed in the 12 months to June 2024. This change highlights that there may be periods when active strategies outperform passive strategies due to short-term market conditions. (Morningstar’s Active/Passive Barometer report is a semi-annual publication that compares the performance of active funds with passive funds. The report analyzes more than 8,000 funds, representing approximately 55% of the U.S. fund market. Masu.)
Fama, whose efficient markets hypothesis is the basis for much of modern financial theory, is unfazed by Asnes’ criticism. His theory is that stock prices reflect all the information available at any given time, making it very difficult for investors to consistently outperform the market. This idea is the basis of modern finance, particularly the growth of passive investing, where funds track market indexes rather than actively picking stocks.
In an interview with the Financial Times in September, Fama acknowledged that markets are not perfectly efficient, but thanks to the collective intelligence of millions of investors, the overall efficiency of the market is He claimed that it was not damaged. He believes that while prices may be wrong from time to time, market forces will correct wrong prices in the long run. Fama champions the EMH as a valuable framework for understanding financial markets, emphasizing that long-term investment horizons and diversified portfolios are key to success in both efficient and inefficient markets. I am.
In conclusion, while Asnes points to growing inefficiencies, he and Fama agree that a long-term perspective and diversification are essential for investors navigating today’s markets. .
