Cliff Asness: Don't Go For The Exacta

Don't Go For The Exacta by Cliff Asness, AQR Capital Management

This issue comes up often, but recently I’ve seen more than the usual amount of “we forecast X, so we’re betting on Y” type stuff where X and Y are different events. The most common, but certainly not the only, example I’ve seen of such a two-step bet is having a strong currency view with a recommendation to buy, or sell, some specific companies that you hope will benefit, or get hurt, if your currency forecast comes true instead of directly buying or selling the currency.

Another example might be having a view that inflation and interest rates will come down, and recommending owning small growth companies because...