Why AQR studies the awesome Warren Buffett


Andrea Frazzini and David Kabiller of AQR Capital Management and Lasse Pedersen of the Copenhagen Business School have produced a study that finds--wait for it--Warren Buffet is one awesome investor. They posit that firms would do well to learn and utilize his techniques, a task easier said than done.

As noted by Bloomberg, the paper found that Buffett's Sharpe ratio is 0.76 since 1976. "That was about twice the stock market's 0.39. The ratio is also larger than all 196 U.S. mutual funds that have been around for 30 years. The median Sharpe ratio for them is 0.37. The review of Buffett's investments concluded he has been rewarded for his use of leverage, coupled with a focus on cheap, safe, quality shares."

The secret sauce apparently is not so secret. Buffett has proven "willing to take on borrowing to finance investment, then picks stocks that have low volatility, are cheap--with low price-to-book ratios--and are high quality, meaning they are profitable and have high payouts," the article states.

The results suggest that "Buffett's returns are due more to stock selection than to the pressure he puts on companies he has stakes in to improve their management."

The really interesting part of all this is Matt Levine's take on why a quantitative hedge fund would undertake a study of the folksy Warren Buffett.

"Value investing, buy and hold, Cherry Coke, the whole schtick is so wholesome and appealing and throwbacky," Levine said. "Saying 'Warren Buffett's investment process is really just overweighting a couple of statistical factors and levering them 1.6 times' is really a way of saying 'levered quantitative hedge fund investing isn't so different from what Warren Buffett does, you know,' though of course it is. Translating folksy value investing into the language of quant hedge funds is a way not only to analyze the folksy investing but also to make the quant funds feel down-to-earth and accessible."

Marketing matters. That's for sure.

For more:
- here is the article

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