Infinite Loops Ep. 298: Cliff Asness – Surviving the Meme Stock Bubble

Date: January 22, 2026
Host: Jim O'Shaughnessy
Guest: Cliff Asness, Co-Founder & Chief Investment Officer, AQR Capital Management

Overview

In this episode, Jim O’Shaughnessy is joined by quant legend Cliff Asness to dissect lessons from surviving multiple speculative market bubbles—from the Dot-Com craze to the recent meme stock frenzy. With their characteristic humility, wit, and candor, they explore the persistence of human behavioral biases in markets, the evolving challenges and tools of quant investing, the false comfort of “volatility laundering” in private assets, and the increasing impact (and opacity) of machine learning in investment strategies.

Main Discussion Points & Insights

1. The Emotional Side of Investing—Prospect Theory in Real Life

• Key Takeaway: Losses hurt more than comparable gains feel good, even for experienced professionals.
  • Quote: "People debate whether prospect theory is real, that losses hurt more than gains. It's very real to me." [01:09, Cliff]
• Both Jim and Cliff admit that even after decades, negative years sting much more than positive years bring joy.
• Practical Note: Rational strategies and discipline help, but investors are still human.

2. Aggression in Bad Times & Explaining “Irrational” Markets

• Cliff’s Approach: When underperformance results from what he sees as ‘stupid’ valuation-driven markets (bubbles), Cliff becomes more aggressive in public communication—doubling down on explaining the quant approach and calling out excess.
  • Quote: "If we lose for reasons that I think are...valuation based, where I think things are getting a little stupid, then I get more aggressive." [03:04, Cliff]

3. Market Bubbles, Manias, and Meme Stocks

• Comparing Bubbles:
  • Dot-Com bubble (1999–2000) vs. COVID/meme stock bubble (ending 2020)
  • Both saw historic value/growth spreads, but 2020 had differences in quality factors and broader crowd participation.
  • Quote: "The mania that typified that time was like... a mind virus." [06:10, Jim]
• Meme Stock Lessons:
  • Gamestop et al. were “extreme examples,” but emblematic of new, gamified retail investing blurring the line between speculation and entertainment.
  • Quote: "I am...convinced there are a lot of [air quotes] ‘investors’ who can't distinguish Fanduel from Robinhood. It's just an app." [09:34, Cliff]
  • Both are concerned about the long-term impact on young investors.

4. Leverage, Risks, and Learning from Crises

• Leverage as a Double-Edged Sword:
  • Powerful in diversified, balanced portfolios, deadly when mixed with illiquidity or inappropriate strategies (e.g., Martingale, basis trades).
  • Quote: "That amount of leverage, it isn't if you're going to die, it's when you're going to die." [11:39, Jim]
• Quants as the “Canary”:
  • Quant strategies are often the first to feel market dislocations—sometimes unfairly, because of liquidity and trading transparency.

5. Model Discipline: Following (or Not) in the GFC

• Unlike the majority of quant managers, Cliff and Jim’s firms refused to override their models during the 2007–08 crisis.
  • Quote: "At no point did we say, all right, take this all off, we don't know what's going on." [15:22, Cliff]
• Painful periods are expected; discipline pays in the long run.

6. Complex Portfolios and the Realities of Diversification

• Large, diversified quant portfolios can seem “boring,” but their strength lies in mitigating idiosyncratic risk.
• Cliff relates stories about being on TV, shorting meme stocks, and receiving hate for calling out overvalued companies.
  • Notable Anecdote (Shorting AMC on CNBC): "The crazies can't hurt us even if they're right..." [24:15, Cliff]
  • Hate mail and social blowback followed, revealing the emotion attached to 'cult' stocks.

7. Machine Learning & 'Surrendering (a Little Bit) to the Machines'

• Adoption with Caution: Machine learning (ML) brings predictive power but greater opacity; Asness admits to a 'two-thirds evidence, one-third story' comfort level, versus the old 50/50 quant blend.
  • Key Insight: "If I understood every step of what it's doing, what's it adding to my world? There almost has to be some opacity..." [43:38, Cliff]
• Natural Language Processing: ML improves on previous sentiment methods, but “why” a model works is increasingly unclear—even as out-of-sample evidence grows.

8. Crowded Trades, Alternatives, and Portable Alpha

• Crowding: Despite fears, quant value strategies are not obviously “crowded” now; more worry is reserved for short-term, more sophisticated strategies overlapping with 'pod shops'.
  • Quote: "I think there are a fair amount of people out there...quicker to trade out of [positions] than we are." [58:34, Cliff]
• Portable Alpha: Cliff argues for running alternatives at higher risk (beta = 1) for efficiency, with proper discipline and prudent limits.
  • "...The theoretically optimal way to invest in us is as high volatility as we're willing to run." [103:13, Cliff]

9. Private Equity: "Volatility Laundering" and the Illiquidity Mirage

• Returns are widely debated, but the main problem is risk masking via infrequent mark-to-market.
  • Quote: "I coined the term volatility laundering." [65:03, Cliff]
  • For most, private equity is levered, illiquid, and potentially overpriced relative to public markets—made ‘easy to hold’ by misleading risk figures.
• Cliff and Jim are wary of the “democratization” of private equity, fearing regular investors are being misled.

10. Behavioral Edges & The Unchanging Human Nature

• Markets evolve, but human overextrapolation and behavioral mistakes remain.
  • Quote: "Human nature has changed millennia by millennia. Arbitraging human nature is your last sustainable edge." [35:01, Jim]
• Narrative investing persists as a trap; Cliff: "I tell them stories about why you shouldn't invest on stories." [106:22, Jim]

11. ESG: Sincere Motive, Dubious Return Edge

• Both see ESG constraints as well-intentioned but, by definition, not likely to enhance expected returns.
  • Quote: "You can't tell people, you're going to make them even more money [with ESG]. Investment constraints have a max, the best they can be is zero expected value." [108:17, Cliff]
• The main effect—if any—is increasing cost of capital (and future returns) for screened-out 'bad' companies.

12. Statistics: The Superpower Everyone Should Learn

• Cliff’s wish, as global 'emperor', is to instill basic statistical literacy universally.
  • Quote: "I think statistics should be taught in junior high. Much more than calculus, for instance." [115:15, Cliff]
  • This, he believes, would help combat financial/media misinformation and improve discourse.

Notable Quotes & Memorable Moments

• On Living Through Market Manias:
  • "In 2020... the value spreads got wider. I still think the dot-com bubble was a little more extreme in a different way... In 2020, it wasn't terrible... it was really evaluation, at least how we see it." — Cliff Asness [07:09]
• On Meme Culture and Robinhood Era:
  • "I avoided watching the [Gamestop] movie for a while because I knew it would make him out to be a bit of a hero... I'm fairly convinced there are a lot of...‘investors’ who can't distinguish Fanduel from Robinhood." — Cliff Asness [09:11, 09:35]
• On Machine Learning's Opacity:
  • "There almost has to be some opacity to it, or it's hard to believe we weren't finding it with simple, intuitive linear statistics before." — Cliff Asness [43:38]
• On Private Equity:
  • "Private equity is active levered equity... a levered active equity portfolio that they're just not marking." — Cliff Asness [68:53]
  • "I coined the term volatility laundering." — Cliff Asness [65:03]
• On Long-Term Factor Edges:
  • "If human nature stays the same and not enough people are willing to take the other side... this could get arbed down. I just don't think... I see no signs of it." — Cliff Asness [35:02]
• On Explaining Portfolios:
  • "For us, we try to be industry neutral... we'll have a thousand longs against a thousand shorts around the world. But in more micro, small ways, we’re a really boring portfolio to actually talk about." — Cliff Asness [19:12]
• Advice to Policymakers (If Emperor):
  • "I think statistics should be taught in junior high... Everything people read, all these crazy things you hear on the Internet, having even some knowledge of statistics, of randomness, would help so much." — Cliff Asness [115:15]

Key Timestamps

• 01:09: Cliff on personal experience with prospect theory and pain of losses
• 05:46: Jim’s “Internet Contrarian” piece and the backlash
• 09:34: The rise of the “app investor” and meme stock reality
• 11:39: The fatal flaw of leverage with illiquidity
• 15:22: Not overriding models during the global financial crisis
• 24:15: Shorting AMC live on CNBC and dealing with the meme cult backlash
• 43:38: Surrendering “a little bit” to the machines—tradeoffs with ML/AI
• 58:34: On quant strategies and crowded trades
• 65:03: “Volatility laundering” in private equity and its dangers
• 108:17: ESG’s real mechanisms and the myth of 'constraint alpha'
• 115:15: Cliff’s dream: universal statistical literacy

Tone & Language

This episode is marked by self-deprecating humor, candid admissions of past errors, and a constant appeal for intellectual honesty and humility. Both Cliff and Jim engage in lively banter, sometimes poking fun at themselves, each other, and the sometimes absurd dynamics of finance and academia.

For Listeners Who Missed the Episode

This episode provides a sweeping look at the evolution of quantitative investing, the persistent pitfalls of behavioral bias, and the impact of technological and societal change on market dynamics. It’s an engaging mix of war stories, practical wisdom, and big-picture reflections—rooted in decades of lived experience riding the world’s wildest financial loops.