Warren Buffett’s Berkshire Hathaway has realized a Sharpe ratio of 0.79 with significant alpha to traditional risk factors. The alpha became insignificant, however, when we controlled for exposure to the factors “betting against beta” and “quality minus junk.” Furthermore, we estimate that Buffett’s leverage is about 1.7 to 1, on average. Therefore, Buffett’s returns appear to be neither luck nor magic but, rather, a reward for leveraging cheap, safe, high-quality stocks. Decomposing Berkshire’s portfolio into publicly traded stocks and wholly owned private companies, we found that the public stocks have performed the best, which suggests that Buffett’s returns are more the result of stock selection than of his effect on management.
About the Author(s)
Andrea Frazzini is a principal at AQR Capital Management, where he is the co-head of the Global Stock Selection team. He is also an adjunct professor of finance at the NYU Stern School of Business. Professor Frazzini’s research has been published in top academic journals, and he has won several awards for his research, including the Smith Breeden Award, the Fama-DFA Prize, the Barclays Global Investors Michael Brennan Award, several Bernstein Fabozzi/Jacobs Levy Awards, and the PanAgora Crowell Memorial Prize. Previously, he served as an associate professor of finance at the University of Chicago Booth School of Business and a research associate at the National Bureau of Economic Research. Professor Frazzini also served as a consultant for DKR Capital Partners and J.P. Morgan Securities and was on the board of directors of the Center for Research in Security Prices at the University of Chicago. He earned a BS in economics from Roma Tre University, an MS in economics from the London School of Economics, and a PhD in economics from Yale University.
David Kabiller is Co-Founder and the Head of Business Development at AQR, overseeing client relationships, business development and strategic initiatives. In this role, he has helped foster AQR’s tradition of innovation by initiating AQR’s international expansion into Europe and Asia and spearheading its introduction of mutual funds. In addition to these corporate milestones, David is dedicated to investor education and fostering young research talent. To that end, he was instrumental in creating the “AQR University” symposia series for financial advisors and the Master Class program for institutional investors. For the academic community, David helped create the AQR Insight Award for outstanding innovation in applied academic research and was a founding member of the LBS AQR Asset Management Institute.
David has co-authored papers on topics including derivatives, enhanced indexation, securities lending, insurance-linked securities and hedge funds. He is the co-author of “Buffett’s Alpha” which received the 2018 Graham and Dodd Award from the Financial Analysts Journal for the year’s best paper. He is a member of Northwestern University’s Board of Trustees and chairman of the Executive Council of the university’s International Institute for Nanotechnology (IIN). He is also a member of the Advisory Council of the AQR Asset Management Institute at London Business School and has served on the Board of Trustees for the Terra Foundation for American Art.
Prior to AQR, David was a vice president at Goldman, Sachs & Co., where he established and maintained relationships with the chief investment officers of many of the largest pension and endowment funds in North America. He earned a BA in economics and an MBA from Northwestern, where he received an athletic scholarship to play tennis and was named to the Big Ten’s Academic All-Conference team. At Northwestern, David founded the Kabiller Prize and the Kabiller Young Investigator Award for researchers in nanoscience and nanomedicine, and established NU for Life, a program dedicated to the professional development of Northwestern student-athletes. He is a CFA charterholder.
Lasse H. Pedersen is a principal at AQR Capital Management, where his focus is research on global investment strategies. He is also a finance professor at Copenhagen Business School and the NYU Stern School of Business. Professor Pedersen has served on the board of the American Finance Association, the Economic Advisory Boards of NASDAQ OMX and FTSE, and the Federal Reserve Bank of New York’s Monetary Policy Panel. He won the Bernácer Prize for the best European economist under 40, the Banque de France–Toulouse School of Economics Prize in Monetary Economics and Finance, and an Elite Research Prize for outstanding researchers under 45. Professor Pedersen’s research has been published in leading journals and cited by central bank governors. He has served on the editorial boards of several journals, including the Journal of Finance, and served as a research associate at the National Bureau of Economic Research and the Centre for Economic Policy Research. Professor Pedersen is the author of Efficiently Inefficient: How Smart Money Invests and Market Prices Are Determined. He earned a BS and an MS in mathematics/economics from the University of Copenhagen and a PhD in finance from Stanford University.