C A P I T A L AQR M A N A G E M E N T

Ronen Israel May 2013 Principal

Michael Angwin National Distribution Manager AQR Australia

Dan Villalon Vice President

A Better Approach to Alternative Investing AQR’s Multi-Strategy Solution for Australian Investors

Preface

Australian financial advisers continue to seek true alternatives as a way to deliver better portfolio outcomes to their clients. However, they have had a range of previous experiences, in part driven by the reality that 'alternatives' is somewhat of a catch-all category encompassing a range of strategies that perform differently through market cycles. Added to this, product structuring and risk management failures have left some questioning the actual value of alternatives in a portfolio context. Investor caution is therefore understandable, as the rules for investing in alternatives are less well-known than for their traditional counterparts. What are the criteria for choosing an ? How many should be included in a portfolio? How do you allocate strategically, and when do you change that allocation? What are the practical challenges for implementation?

This paper presents AQR's thinking on these parameters. We end with the case for liquid multi-strategy alternative funds, which we believe should form the core of most investor's alternatives allocation.

We thank , Arthur Fischer-Zernin, Marco Hanig, David Kabiller, John Liew and Simon Wills for helpful comments and suggestions; and Georgi Georgiev and Ryan Kim for data and analysis. We also thank Jennifer Buck for design and layout.

Please read important disclosures at the end of this paper.

AQR Capital Management, LLC I Two Greenwich Plaza, Third Floor I Greenwich, CT 06830 I T : 203.742.3600 I F : 203.742.3100 I www.aqr.com

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I. Alternatives Should Be Uncorrelated In the real world, many managed funds with an 'alternatives' label are often more like the 0.7 correlated asset, than they are Today, most investors, especially those focused on the long the uncorrelated asset. Exhibit B shows the correlation of term, understand that the goal of a portfolio is to maximise alternative managed funds3 operating in Australia to an not just return, but also risk-adjusted return. Adding example 60/40 portfolio as described in Exhibit A. For alternative investments to a traditional portfolio is a way to investors who want a diversifying return source, the results on potentially do this, reducing downside risk while maintaining average are not encouraging. or even increasing the portfolio's expected return. However, not all alternatives are created equal. Those that are II. Alternatives Should Be Packaged highly correlated with traditional assets do little to improve a Appropriately portfolio's efficiency. Exhibit A shows a starting 60/40 portfolio that makes an allocation to three different alternative Beyond risk-adjusted returns and correlation benefits, investments. Each alternative has the same expected return investors also need to carefully consider the investment structure used to gain exposure to alternative strategies. The and volatility of returns, but different degrees of correlation to the starting portfolio. The asset with zero correlation has the issues certain fund managers faced in 2008/2009 highlighted most favorable impact on the portfolio's Sharpe ratio1, and on how the fund structure can be just as important as the underlying investments. important risk measures such as volatility, realised drawdown and worst 3-year return. The improvement in Sharpe ratio Liquidity Mismatch Risk comes from a reduction in portfolio volatility, but the benefits can also extend to a higher expected long-term return - if All investors prefer more liquid investments – daily if they can investors pursue more aggressive strategies elsewhere or are get it. However, many investment strategies that fall under the better able to stick with the portfolio through a full market- 'alternatives' category do not naturally provide that level of cycle.2 liquidity (indeed, certain strategies attempt to harvest an illiquidity premium, as discussed in the following section). These less-liquid strategies can be valuable portfolio EXHIBIT A: Low correlations matter inclusions for those who are willing and able to accept that a Effect of adding assets with identical return and portion of their portfolio may not be able to be redeemed on volatility, but different correlations any given day. (January 1994 – December 2012) 0.35 More importantly, when considering an investment in an

0.30 alternative fund, investors should consider whether the

0.25 liquidity of the underlying investment matches the liquidity terms offered by the fund to its investors (liquidity matching). 0.20

Sharpe Sharpe Ratio A fund which offers its investors a level of liquidity which it 0.15 cannot match in times of market stress, can lead to dire 0.10 outcomes - such as suspended redemptions or fund 60/40 Adding 0.7 Adding 0.4 Adding 0.0 Correlated Correlated Correlated terminations - if the fund manager cannot free up enough Asset Asset Asset capital to satisfy redemption requests in a timely manner. Source: AQR, Dow Jones Credit Suisse, Fund Research Inc. Note: 60/40 portfolio consists of 30% S&P/ASX 300 Index, 20% MSCI World ex-Australia Index, 10% S&P/ASX 200 A-REIT Index, 20% UBS Australian Composite Bond Index, 15% Transparency Barclay/Lehman Global Aggregate Index, and 5% cash. Subsequent bars take 80% of the 60/40 portfolio and 20% of the new asset. The 0.7 correlated asset is the HFRI Equity Hedge Index, the 0.4 correlated asset is the DJCS Convertible Index, and the 0.0 correlated asset is the DJCS Managed Futures Index. Each of these indices is scaled to the Alternative managers are notoriously opaque, often providing same return and volatility as the 60/40 portfolio. little or no timely information as to their sources of return. Due to the nature of the strategies, managers do need to be cautious regarding their public disclosures; however, we

1 Sharpe ratio is used to measure risk-adjusted performance. It is calculated by believe that investors should, at a minimum, be enabled to dividing the portfolio's excess return (portfolio return less the risk free rate) by the standard deviation of portfolio returns. Standard deviation is a measurement of understand their fund manager's investment strategy, risk and the investment's volatility. The higher the Sharpe Ratio, the better the portfolio's return characteristics, performance attribution and current return in risk adjusted terms. 2 We believe lowering the risk, even if the expected return remains the same, positioning. This level of transparency allows investors to yields a higher expected return across a full market-cycle, since investors are more likely to stick with their portfolio rather than taking risk down after realising losses. 3 Alternative managed funds as categorised by Morningstar.

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0.9 EXHIBIT B: Many alternative managed funds are not diversifying enough 0.8 Correlations of 12 alternative managed funds to a 60/40 portfolio 0.7 (January 2006 – December 2012)

0.6 0.9 0.8 0.5 0.7

0.6 0.4 0.5 0.3 0.4 0.3 0.2 Correlation 0.2 0.1 0.1 0.0 0 -0.1 Fund 2 Fund 3 Fund 4 Fund 1 Fund 8 Fund 5 Funddata 6 Fund 7 Fund 11 Fund 9 Fund 10 Fund 12

Long- Multi-Alternative

Source: AQR, Morningstar Note: For simplicity, we have selected the 12 funds in December 2012 that have existed since January 2006. This introduces a “survivorship bias”, but we think that the effects of this are small, as correlations of many alternative managed funds launched since 2006 are similar to those shown above.

managed with sufficient liquidity and without high levels of improve their knowledge of the fund's investment approach leverage. and its role within their broader portfolio, and to identify any changes of approach through time, such as style drift (where a Low Correlation to Traditional Assets manager deviates from their stated strategy) or changes to the fund's liquidity or leverage profile. One way to achieve low correlation is to focus on strategies that take advantage of a mispricing between relatively similar Reasonable Fees assets, i.e., relative value opportunities. By going long (buying) the cheaper assets and shorting (selling) the more Alternative managers have historically charged higher fees expensive assets, relative value strategies position themselves compared to their traditional counterparts. This is often to make money when normal pricing is restored, while being warranted, as alternative strategies often require greater hedged to general market movements. Strategies that take implementation skill than long only traditional assets such as directional positions may also be valuable alternatives, but the equities and bonds. Our view is that investors should pay fees magnitude of these positions should be managed and they commensurate with the expected risk-adjusted returns and should not be a source of passive long exposure. That is, they diversification potential of the strategy being delivered. We should not be biased over time to have a long exposure to feel investors shouldn't have to pay '2% + 20%' fees to get markets as this will necessarily increase correlations to the rest exposure to well-known alternative strategies that are of a portfolio's assets. For example, a managed futures strategy uncorrelated with traditional equity and bond markets; and might be directionally long or short the , but the they certainly shouldn’t pay high fees when those returns are, strategy's total long position will be capped, and the average in fact, highly correlated with traditional equity and bond equity exposure over time should be close to zero. markets.4

Attractive Expected Returns III. Identifying Attractive Strategies To evaluate expected returns, investors often examine Our investment approach is to build each alternative strategy historical performance data. Such analysis has some value, but from the bottom up. Before we can get to that stage, we need we prefer alternatives in which there is also an economically to identify strategies that offer a low correlation to traditional intuitive reason for positive returns to continue. We apply this asset classes and attractive expected returns, and can be test when assessing potential alternative strategies.

4 For more insight, refer to another AQR paper 'Is Just Waiting To Be Discovered? – What the rise of Beta Means for Investors'.

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EXHIBIT C: Classic hedge fund strategies

Equity Strategies Macro Strategies Arbitrage Strategies

Dedicated Equity Fixed Convertible Long- Global Emerging Managed Event Short Market Income Bond Short Macro Markets Futures Driven Bias Neutral Arbitrage Arbitrage

Source: AQR

Consider convertible-bond arbitrage. Convertible arbitrageurs Strategy Definitions seek to capture the difference between the price of a convertible bond and the value of its underlying parts (more Arbitrage Strategies6 details on this strategy are provided in the next section). There are two economic drivers of this difference in price: seeks to capture the discount of convertible bonds are generally less liquid than stocks and convertible bonds relative to the fair value of their constituent bonds; and companies that may otherwise have difficulty parts (a corporate bond plus a call option on the company accessing credit markets often pay a premium to issue stock). As convertible bonds tend to trade with lower convertible bonds more easily. Other alternative strategies liquidity, they tend to be priced at a discount to fair value – a have similar intuitive explanations. discount that can be captured by buying the convertible bond and hedging out the equity, credit and interest rate risks Categorising Liquid Alternatives inherent in the convertible bond. The return premium to the strategy is essentially compensation for the liquidity risk taken Strategies that meet our investment criteria tend to be 'classic' on by the convertible bond holder – a risk that can be hedge fund strategies, most of which hedge fund managers managed through holding a broad portfolio of convertible have been pursuing for decades.5 They focus on relative value bonds, diversified by issuer, industry and geography. opportunities and typically take long and short positions in similar securities. We group the alternative strategies in our Event Driven attempts to capitalise on price discrepancies and portfolios into three broad categories: arbitrage strategies, opportunities generated by corporate activity. One example is which typically capture relative mispricing between two Merger Arbitrage. When a merger of two companies is related assets; equity-oriented strategies, which take advantage announced, the target company's stock price generally of market inefficiencies in stocks; and macro strategies, which increases, but not fully to the price offered by the acquirer. profit from dislocations in global equity, bond, currency, and The remaining spread reflects the risk that the merger will not commodity markets, including those driven by investors' be completed. Arbitrageurs seek to capture this spread in behavioral biases and by the actions of market participants exchange for providing liquidity to those investors who no whose goal is not investment profits (e.g., central banks). At a longer want to hold shares in the target company. A common more granular level, the Dow Jones Credit Suisse Hedge Fund approach to capturing this spread involves buying the target Index categorises liquid alternatives into nine primary company's stock and short-selling the acquiring company's strategies (as shown in Exhibit C). stock, thereby creating a market-neutral investment where the primary remaining risk is deal failure. While deals do fail for a range of reasons, holding a well-diversified portfolio of merger deals meaningfully reduces the portfolio impact of any single event.

5 Classic strategies are defined in more depth in BNY Mellon's April 2009 6 For further description of Arbitrage strategies, please see AQR white paper “Thought Leadership Series”. “Arbitrage: A Brief Introduction” for more details. Available upon request.

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Fixed Income Arbitrage aims to profit on mispricing in global unconstrained in their approach, though commonly seek to fixed income markets. These strategies may earn a risk profit from valuation-based opportunities, carry-based premium associated with liquidity, or take advantage of strategies, and trends, seeking to capture dislocations that are inefficiencies created by large players (e.g., central banks), caused by investor behaviours or market frictions. They also whose actions are not motivated by economic profit. Fixed seek to exploit inefficiencies caused by market participants, income strategies are wide-ranging, and many require high such as central banks, who are not seeking to maximise degrees of leverage or trade relatively illiquid markets. At the profits. Often referred to as a relative-value portfolio, global very liquid end of the spectrum are classic strategies such as macro strategies are generally (equally long fixed income relative value, which seeks to identify over- and and short) in global currency, bond, equity and commodity undervalued assets including (but not limited to) government markets. bonds, utilising a range of metrics such as carry, sentiment Managed Futures aims to profit from exploiting trend and economic outlook. Market mispricings can be targeted by following7 () strategies; that is, buying creating a long (undervalued) and short (overvalued) portfolio assets that have been rising and selling assets that have been of fixed income assets, generating returns when the different declining. The strategy is typically applied to liquid exchange- markets return to more normal pricing patterns. traded futures contracts on various commodities, equity

indices, currencies and developed market bonds to take Equity Strategies advantage of short to medium and long-term trends.

Long/Short Equity aims to profit from inefficiencies in market Emerging Markets aims to profit from inefficiencies in market prices for common stocks. The strategy is typically executed prices for a range of emerging-market investments. The using bottom-up analysis by buying (going long) stocks which strategy employs macro, trend-following and relative-value are underpriced relative to their growth prospects and selling strategies as described above, and applies them across (shorting) stocks that are considered expensive. emerging equity markets, bond markets and currencies. Equity Market Neutral seeks to profit from inefficiencies in market prices for common stocks and earn a short-term IV. Building Each Alternative Strategy liquidity premium. The strategy employs long/short positions As investors, AQR seeks to build portfolios that capture the in a range of stocks with an emphasis on holding high-quality return sources we have identified. Rather than pursue a top- companies trading at a discount to their intrinsic value. The down replication strategy or allocate to separate managers, we strategy also focuses on market neutrality, aiming to isolate actually build individual strategies from the bottom-up. the mispricing between different stocks without generating passive equity market exposure. Our approach to building alternative strategies focuses on diversification. In the case of convertible arbitrage, we Dedicated Short Bias primarily focuses on identifying stocks diversify across a broad range of bonds such that the whose returns are likely to underperform their peers. performance of any single convertible bond or issuer does not Dedicated short bias earns a risk premium from shorting dominate the portfolio's performance. For managed futures, stocks where most investors are unwilling or unable to take a we seek to include the broadest possible range of liquid negative view. To reduce market exposure (in this case short futures contracts, such that poor performance in one asset market exposure) dedicated short bias managers may hold a class has a minimal effect on the strategy's overall short/long portfolio that sells short stocks that are most performance. Likewise, our global macro strategy includes a disliked, while hedging with a long portfolio of more wide range of stock, bond and currency exposures, rather attractive stocks. than just focusing on a limited set of pair-trades.

Macro Strategies Across all strategies, we seek to trade efficiently using systems to minimise transaction costs. Global Macro is an eclectic group of strategies that generally aim to profit from inefficiencies and imbalances in global capital markets. Global macro managers are often relatively

7 For further description of Managed Futures strategies, please see AQR white papers “Understanding Managed Futures”, “Century of Investing” and “Demystifying Managed Futures” for more details. Available upon request.

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V. Putting the Pieces Together How to Allocate? Not by Dollars, but by Risk.

While the success of an alternatives portfolio is dependent on For traditional equity investors, market-cap weighting is the individual strategy performance, the relationship among the standard approach to allocation. But for alternatives investors, strategies is at least as important. There are three major issues this results in a concentrated portfolio (Exhibit E), as the in effective portfolio construction: majority of assets are in just a few strategies. In 2012, for  How many strategies to include? example, three hedge fund styles had approximately 75% of  How to allocate to each strategy over the long term? all hedge fund AUM. This 'market-cap' alternatives portfolio is highly concentrated, meaning investors miss out on much of How to adjust on a tactical basis?  the benefits of diversification. Furthermore, allocation by

market cap can lead to systematically being overweight those How Many Strategies? More Is (Generally) styles that may be overcapitalised. Equal-dollar weighting is Better. another common approach, but here strategies with higher Adding more strategies, as discussed earlier, does not volatility per dollar make a disproportionate contribution to guarantee a more diversified portfolio because diversification overall risk. depends on correlation. For example, most equity strategies (large, small, growth, value, global, etc.) are highly correlated EXHIBIT E: The alternatives industry as a whole is not diversified with each other,8 so adding more has only limited value (as witnessed in 2008). Market Cap (AUM) weighting

2% 2% <1% However, if the strategies being considered are uncorrelated to Event Driven each other, including more of them can generally improve the 6% Long/Short Equity portfolio's risk-adjusted return. In practice, alternative 6% 29% Global Macro strategies tend to have very low correlations with each other 8% Emerging Markets (the strategies in Exhibit D have an average pairwise Fixed Income Arb correlation of 0.11), which means that there is real value in Managed Futures Convert Arb EXHIBIT D: Significant diversification 23% 24% Equity Mkt Neutral potential within alternatives Dedicated Short Bias Correlations of hypothetical alternative strategies (1994 – 2012) Source: AQR, Dow Jones Credit Suisse (2012) Ded Eq Fixed Note: Chart is for illustrative purposes only. Convert Short Emg Mkt Event Inc Global L/S Mgd Arb Bias Mkts Neutral Driven Arb Macro Equity Fut Convert Arb 1.00

Ded Short Bias 0.04 1.00 We prefer to set allocations such that each strategy makes a Emg Markets -0.15 -0.07 1.00

Eq Mkt Neutral 0.10 0.07 0.10 1.00 9 roughly equal contribution to the overall risk of the portfolio. Event Driven 0.07 0.11 0.12 0.07 1.00

Fixed Inc Arb 0.02 0.05 0.22 0.10 0.02 1.00 To illustrate the importance of diversification, Exhibit F shows Global Macro -0.15 0.07 0.38 0.16 0.12 0.36 1.00

L/S Equity -0.02 -0.06 0.24 0.44 0.23 0.15 0.29 1.00 the hypothetical returns to nine alternative strategies and two Mgd Futures -0.06 0.07 0.03 0.09 -0.04 0.13 0.41 0.22 1.00 Median 0.00 0.06 0.11 0.10 0.09 0.12 0.23 0.22 0.08 ways of diversifying them (green bars). Allocating by market Source: AQR cap does diversify the overall portfolio, but allocating by risk Note: Correlations for alternative strategies are calculated using hypothetical AQR performance. Please see important risk disclosures relating to hypothetical results at the leads to meaningfully higher risk-adjusted returns. end of this paper. getting more strategies into a portfolio. However, investors Why? Even the best-performing individual strategies can realise substantial short-term drawdowns and go through should remember there is a limited set of liquid alternatives strategies with low correlations and attractive returns. They extended periods of anemic returns (bottom of Exhibit F). should not relax their investment criteria simply to get more Each of the nine alternative strategies has realised a meaningful drawdown historically (some exceeding -30%). A strategies into the portfolio. portfolio that is dominated by just a handful of these strategies

9 8 One representative set of equity indices we constructed had an average This “risk balanced” allocation can be thought of in a number of ways, but the pairwise correlation of 0.8. core idea is that results of each strategy will make a comparable contribution to the long-term results of the strategy, if the long-term efficacy of each is similar.

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EXHIBIT F: Diversifying by risk can improve portfolios

Performance characteristics of hypothetical AQR strategies, 1994 – 2012 (all strategies scaled to 6% volatility) 2.0

1.5

1.0

Sharpe Ratio Sharpe 0.5

0.0

Fixed Allocating Dedicated Emerging Equity Mkt Long/Short Managed Global Income Event Convert by Market Allocating Short Bias Markets Neutral Equity Futures Macro Arb Driven Arb Cap by Risk Worst Drawdown -36% -29% -11% -17% -13% -31% -8% -18% -29% -13% -10% Worst 3-yr Cumulative Perf -30% -26% -11% -12% -12% -21% -5% -13% -18% 3% 12%

Source: AQR, Dow Jones Credit Suisse. Notes: Strategies shown above are back-tests of hypothetical AQR multi-strategy portfolios, targeting 6% annual volatility, gross of fees and net of assumed transaction costs. “Allocating by Market Cap” builds a portfolio of the hypothetical alternative strategies shown above using the strategy weights of the Dow Jones Credit Suisse Index. “Allocating by Risk” builds a portfolio of the same strategies using AQR's risk-based approach to strategic allocation. Hypothetical performance has inherent limitations. Please see important disclosures relating to hypothetical performance at the end of this paper. may suffer disproportionately in periods of as leverage risk, liquidity risk, correlations and left-tail risk. underperformance. By contrast, a portfolio that is diversified All should be considered in the allocation process. At AQR we by risk tends to be more resilient. Note that historically, each employ drawdown control, exposure and leverage limits, and of the single strategies has a three-year period of negative maintain sufficient cash liquidity – all of which require returns, while the worst three-year period for the risk- substantial infrastructure, and which we believe are critical to allocated portfolio was positive. managing multi-strategy alternative funds.

Tactical Tilts? Look for Qualitative and VI. Implementation for Investors Model-Driven Signals. Exhibit G shows the power of a well-constructed alternatives After setting a strategic allocation, investors must decide portfolio. We diversify a 60/40 portfolio by reducing equity whether and how to make tactical shifts, typically to increase exposure (the dominant risk) and adding exposure to our exposure to strategies that have become more attractive, and hypothetical multi-strategy alternatives portfolio. Even at 10% reduce exposure to strategies that have become less so. of the total portfolio, average return (from 7.2% to 7.6%) and We believe the primary source of returns comes from the Sharpe ratio (from 0.23 to 0.33) both increase meaningfully, strategic allocation to alternatives, but that tactical tilts can with less volatility and a smaller worst drawdown. also add some value. One reason AQR makes tactical tilts is There are two basic approaches to implementing multiple that alternative strategies are inherently capacity-constrained. alternative strategies in a portfolio: one, invest with multiple Because of this, large capital flows into strategies can degrade single-strategy investments; and two, invest with one or more forward-looking returns, and undercapitalised strategies may funds that provide multi-strategy exposures. A third option is offer better-than-normal returns going forward. The fact that to take a hybrid approach, with multi-strategy funds as the alternatives investors in aggregate seem to chase managers and core of the portfolio and single-strategy funds as 'satellites.' strategies with strong performance can magnify these tactical opportunities for contrarian investors. For investors looking for a core alternatives allocation, we believe that multi-strategy funds are the better choice. Multi- A Note on Risk Management strategy funds are better able to maintain strategic and tactical A relative value, diversified alternatives portfolio has allocations across strategies. Managers can ensure that no intrinsically less equity risk than the equity market, yet has single strategy dominates the portfolio's risk profile, and they other risks to be monitored and actively managed. Managers can rebalance the portfolio regularly to maintain have many tools for assessing risk, from simple measures such diversification across market environments. On a tactical basis, as volatility and value-at-risk, to more sophisticated ones such multi-strategy managers have much greater flexibility to

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EXHIBIT G: Adding alternatives can improve a traditional portfolio

Example Traditional 10% Allocation to 20% Allocation to Portfolio Alternatives Alternatives

Hypothetical performance, 1994 – 2012 Average annual return 7.2% 7.6% 8.1% Annualised volatility 6.7% 6.2% 5.6% Sharpe Ratio 0.23 0.33 0.43 Worst drawdown -28% -25% -21%

Source: AQR Note: The alternative multi-strategy allocation above uses monthly data from a hypothetical AQR multi-strategy alternative portfolio, and is gross of fees and net of transaction costs. Please see important disclosures relating to hypothetical performance at the end of this paper. Example Traditional Portfolio consists of 30% S&P/ASX 300 Index, 20% MSCI World ex-Australia Index, 10% S&P/ASX 200 A-REIT Index, 20% UBS Australian Composite Bond Index, 15% Barclay/Lehman Global Aggregate Index, and 5% cash. allocate risk and investment capital based on the attractiveness Conclusion of each strategy. By contrast, single-strategy managers Institutional investors have long embraced alternative typically have to stick with the same strategy even if the strategies, whose long-term efficacy and effective current environment is not hospitable. diversification add significant value. With the rise of Investors looking for core alternatives exposure can also alternative multi-strategy funds in more liquid, transparent, benefit from the practical simplicity of multi-strategy funds. It and investor-friendly formats, we are optimistic that a wider takes considerable effort to create a portfolio of wide ranging range of investors will be able to access these valuable tools alternative strategies, size them relative to each other, then for enhancing portfolio returns. We leave you with what we maintain and monitor them over time. Multi-strategy funds believe are the three key considerations when it comes to provide exposure to a range of strategies with a single investing in alternative strategies: seek low correlations to investment, offering a balanced solution for investors. traditional assets; diversify broadly across strategies; and Multi-strategy funds do have some limitations. Investors may diversify by risk not capital. struggle to assess how big a role each strategy plays in the multi-strategy fund over time, and how well the multi-strategy manager executes each strategy relative to other managers in the space. Furthermore, there is a natural skepticism about whether a multi-strategy manager can really have expertise in every strategy in its portfolio. We believe that these concerns can be addressed by transparency: if investors understand how the fund is managed, they can better assess its strategic allocation and ability to add value in each strategy group.

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Disclosures

This document has been provided to you solely for information purposes and does not constitute an offer or solicitation of an offer or any advice or recommendation to purchase any securities or other financial instruments and may not be construed as such. The factual information set forth herein has been obtained or derived from sources believed to be reliable but it is not necessarily all-inclusive and is not guaranteed as to its accuracy and is not to be regarded as a representation or warranty, express or implied, as to the information's accuracy or completeness, nor should the attached information serve as the basis of any investment decision. This document is intended exclusively for the use of the person to whom it has been delivered and it is not to be reproduced or redistributed to any other person. The views and opinions expressed herein are those of the author and do not necessarily reflect the views of AQR Capital Management, LLC its affiliates, or its employees. Past performance is not an indication of future performance. Diversification does not eliminate the risk of experiencing investment losses. Gross performance results do not reflect the deduction of investment advisory fees, which would reduce an investor's actual return. For example, assume that $1 million is invested in an account with the Firm, and this account achieves a 10% compounded annualised return, gross of fees, for five years. At the end of five years that account would grow to $1,610,510 before the deduction of management fees. Assuming management fees of 1.00% per year are deducted monthly from the account, the value of the account at the end of five years would be $1,532,886 and the annualised rate of return would be 8.92%. For a ten-year period, the ending dollar values before and after fees would be $2,593,742 and $2,349,739, respectively. AQR's asset based fees may range up to 2.85% of , and are generally billed monthly or quarterly at the commencement of the calendar month or quarter during which AQR will perform the services to which the fees relate. Performance fees are generally equal to 20% of net realised and unrealised profit each year, after restoration of any losses carried forward from prior years. In addition, AQR funds incur expenses (including start-up, legal, accounting, audit, administrative and regulatory expenses) and may have redemption or withdrawal charges up to 2% based on gross redemption or withdrawal proceeds. Please refer to AQR's ADV Part 2A, for more information on fees. Consultants supplied with gross results are to use this data in accordance with SEC, CFTC, NFA or the applicable jurisdiction's guidelines. Hypothetical performance results (e.g., quantitative back tests) have many inherent limitations, some of which, but not all, are described herein. No representation is being made that any fund or account will or is likely to achieve profits or losses similar to those shown herein. In fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently realised by any particular trading program. One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of hindsight. In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk in actual trading. For example, the ability to withstand losses or adhere to a particular trading program in spite of trading losses are material points which can adversely affect actual trading results. The hypothetical performance results contained herein represent the application of the quantitative models as currently in effect on the date first written above and there can be no assurance that the models will remain the same in the future or that an application of the current models in the future will produce similar results because the relevant market and economic conditions that prevailed during the hypothetical performance period will not necessarily recur. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results, all of which can adversely affect actual trading results. Discounting factors may be applied to reduce suspected anomalies. Hypothetical performance results are presented for illustrative purposes only. There is a risk of substantial loss associated with trading commodities, futures, options, derivatives and other financial instruments. Before trading, investors should carefully consider their financial position and risk tolerance to determine if the proposed trading style is appropriate. Investors should realise that when trading futures, commodities, options, derivatives and other financial instruments one could lose the full balance of their account. It is also possible to lose more than the initial deposit when trading derivatives or using leverage. All funds committed to such a trading strategy should be purely risk capital. AQR Capital Management, LLC is exempt from the requirement to hold an Australian Financial Services License under the Corporations Act 2001 (Cth). AQR Capital Management, LLC is regulated by the Securities and Exchange Commission ("SEC") under United States of America laws, which differ from Australian laws. Please note that this document has been prepared in accordance with SEC requirements and not Australian laws.

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