From Barron's cover:
Cliff Asness’ approach has helped make AQR’s liquid-alt mutual funds among the best in the business.
Since U.S. stocks peaked in July, few investments have produced strong returns. Global stocks, junk bonds, and most commodities have declined—in many cases, sharply. And many so-called alternative investments have failed to provide hoped-for diversification benefits. Just look at the big losses suffered by some notable hedge funds.
The situation hasn’t been much better among liquid alternatives, or mutual funds that use hedge fund strategies such as merger and convertible arbitrage, long/short equity, and trend-following in futures markets. Yet, against this tough backdrop, a bunch of academics are delivering. Their firm, AQR Capital Management (AQR stands for applied quantitative research), is a distinctive investment manager with $141 billion in assets that seeks to translate academic insights about finance and the markets—such as the appeal of value and momentum investing—into winning quantitative strategies for institutional and retail buyers.
Nearly all of AQR’s liquid-alt mutual funds are in the black since late July, including the industry’s largest fund, the $11 billion AQR Managed Futures Strategy (ticker: AQMIX), which is up 7% through mid-February, against an 11% drop in the Standard & Poor’s 500 and a 16% decline in the MSCI World index over the same period (see chart, below). “This has been one of the periodic reminders of the benefits of diversification. There has been a view since the market bottom in 2009 that all you needed was the S&P 500 index,” says David Kabiller, a founding principal of the 18-year-old firm, based in Greenwich, Conn. The other two founding principals are Cliff Asness and John Liew.
Indeed, the stock market selloff since the start of this year has shaped up as a key test of whether liquid alts can deliver the promised diversification and protect investors during downturns. Liquid-alt funds have been rightly criticized for generally disappointing returns during the recent bull market—and high fees, to boot.
The performance of AQR’s liquid-alt funds has been good so far this year, with most in the black and besting many big rival funds (see nearby table). “What has happened this year is a nice data point that we are doing what we say,” says Asness. “I’m proud of what we’ve done, but I want to be intellectually honest. One data point doesn’t prove a concept, and I look forward to proving it many more times.”
AQR’s staff of more than 600 boasts 52 Ph.Ds, including Asness, who was Eugene Fama’s student and teaching assistant at the University of Chicago. Fama, a Nobel laureate and former student of Milton Friedman, is known as the father of efficient-markets theory. The AQR academics would stack up well against the finance faculty at major universities. This brainpower is harnessed to develop and execute quantitative strategies that can generate market-beating returns. “You would be surprised how much effort it takes to turn the academic into the practical. Making money for clients involves controlling costs, managing risk, and building real portfolios. Academic work is just the tip of the iceberg,” says Liew.AQR is the largest manager in the fragmented, growing, and controversial liquid-alt market. The firm had $17 billion in liquid-alt assets, plus a smattering of long-only strategies, with total fund assets of $23 billion at year-end 2015. It is the liquid-alt industry’s biggest grower, with $7 billion of inflows since the start of 2015. The industry totals $170 billion, excluding go-anywhere, unconstrained bond funds.
“AQR is the clear leader in delivering alternative strategies to retail investors,” says Morningstar analyst Jason Kephart. “It has developed strategies that move to their own beat and fulfill the promise of delivering uncorrelated returns that will diversify a traditional portfolio.”