Asness: Factors Could Be ‘Arbitraged Away’ by ETFs

The popularity of factor-based investing may prove its downfall as fundamental drivers are eroded, AQR founder Cliff Asness has warned.

Asness outlined how the rise of exchange-traded funds (ETFs) tracking factor-based strategies might affect their future performance, during a question-and-answer session at Fund Evaluation Group’s annual investment forum.

“I worry about some of the other factors being arbitraged away more” than value, he said. “But we’re not even close to getting there.”

Asness previously defended factor investing in a blog post last August, arguing that value, momentum, carry, and quality strategies will continue to reap returns, “though perhaps not at the same level and with different risks than in the past.”

This week, however, he admitted to being “wide open” to the idea that the strategies might one day disappear.

“We can’t all tilt one way,” Asness said. “That squeezes the factor and it stops working.”

But while the end is in sight, Asness said he doesn’t think it has arrived just yet. Factor-based ETFs, therefore, could still perform in the meantime—it just depends on the factor.

For example, Asness said the value factor should continue to drive returns since its performance comes from the higher risk involved in buying cheaper assets, as well as investor behavior.

“It comes down to why you think that factor works,” he said. “Dumb luck is one potential answer, but I don’t think it is.”