Cliff Asness: Why Markets Have Gotten Less Efficient

During his recent interview with the Stigler Center, Cliff Asness, founder of AQR Capital Management, diagnosed the current state of markets saying. “Markets are assuredly not perfectly efficient,” channelling his mentor Gene Fama, but he warns they’ve grown “prone to bouts of extreme inefficiency.”

Asness points to two glaring examples: the dot-com bubble and the 2020 meme-stock frenzy. “The .com bubble was the largest event in this disparity we look at ever in the data,” he recalls. “Then almost exactly 20 years later, it became a twice in a lifetime event.”

For investors, this creates both risk and opportunity. Asness admits his firm’s goal isn’t to fix markets: “Our goal is to make our clients money, not to make markets more efficient. That is a lovely secondary thing.” Yet he acknowledges quant strategies can help correct mispricings—sometimes.

“If you are doing an old-school Graham and Dodd type strategy, you are a force for making the market more efficient.” But momentum trading? That’s murkier. “Markets can underreact to new information,” he says, but they can also spiral into “pure feedback trading where people are just chasing prior returns.”

He aligns with Fama’s skepticism but leaves room for doubt: “I am 100% confident the world won’t suddenly decide [it’s] what they have faith in.” As for AI’s role in finance, he’s cautiously optimistic: “ML is finding things that are harder to put into words… markets might change in what they reward more through time.” But don’t expect machines to prevent bubbles: “The challenge isn’t figuring out what’s going on—the challenge is holding on.”

Asness also discussed the intersection of politics and markets. Tariffs, he notes, now span the ideological spectrum: “Trump raised them the first time; Biden had his chance to lower them—he did not.” Adding, “Both markets and politics are much more susceptible to mob psychology.”

Through it all, Asness clings to a quant’s humility: “Real life is probably the case where half the theories are totally nonsense and the other half have some degree of truth.” His advice? Stay disciplined—and don’t expect free lunches, especially in ESG: “If you give us an ESG restriction… you should expect us to do worse for you.”

In a rallying cry for clarity, or as he puts it: “I still believe in this country. I still think we have the rule of law.” But he’s watching the madness—and trading accordingly.

You can listen to the entire interview here: