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Friday, 21 March 2014

Have Researchers Uncovered Buffett's Secret?

By Robert Huebscher

Researchers from AQR Capital Management, a Connecticut-based asset manager, claim they have uncovered the source of Warren Buffett’s alpha. They believe Buffett-like performance can be achieved by constructing a portfolio with exposure to certain “factors.” But their theory hinges on a crucial assumption, which, as I will show, is highly tenuous.

Buffett’s returns, based on Berkshire Hathaway’s stock price, didn’t come from successful stock-picking, AQR claims. Rather, the source of his outperformance was from his exposure to low-beta and high-quality stocks.

AQR and Dimensional Fund Advisors (DFA) have begun to incorporate those factors into their portfolio construction. This research raises the hope of duplicating Buffett’s success in a conventional, open-ended mutual fund.

I’ll look at the findings of this research and why I am skeptical of its implications.

Read the rest of the article here.