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THE DOW JONES BUSINESS AND FINANCIAL WEEKLY www.barrons.com FEBRUARY 29, 2016

John Liew, Cliff Asness, David Kabiller, and a team of high-powered Ph.Ds have built AQR into a $141 billion investment giant that gets impressive returns in good markets and bad.

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COVER STORY February 29, 2016 AQR’s academic research has ledBARRON to someS truly alternative funds. S5

COVER STORY MarketAQR’s academic research has Brainiacs led to some truly alternative funds. by Andrew Bary MarketPhotography by Derek Dudek Brainiacs SinceSince U.S. U.S. stocks stocks peakedpeaked inin July,July, few few investmentsshort equity, and have trend-following produced instrong futures returns. funds Globalare in the stocks, black junksince bonds,late July, and in- investmentsby Andrew have produced Bary strong returns. markets. Yet, against this tough backdrop, cluding the industry’s largest fund, the $11 Globalmost commoditiesstocks, junk bonds, have and declined—in most com- manya bunch cases, of academics sharply. are And delivering. many so-called Their billion alternative AQR Managed investments Futures have Strategy failed moditiesPhotography have by declined—in Derek Dudek many cases, firm, AQR Capital Management (AQR (ticker: AQMIX), which is up 7% through sharply.to provide And hoped-formany so-called diversification alternative standsbenefits. for appliedJust look quantitative at the research),big losses mid-February, suffered by against some an notable 11% drop hedge in the Since U.S. stocks peaked in July, few investments have produced strong returns. Global stocks, junk bonds, and investmentsfunds. • The have situation failed to providehasn’t beenhoped- muchis a better distinctive among investment liquid alternatives,manager with orStandard mutual &funds Poor’s that 500 useand ahedge 16% decline fund formost diversification commodities benefits. have Just declined—in look at the many$141 cases,billion insharply. assets thatAnd seeks many to so-calledtrans- in alternative the MSCI Worldinvestments index over have the failed same bigstrategies losses suffered such asby somemerger notable and hedge convertible late academic arbitrage, insights long/short about finance equity, and and period.trend-following “This has been in futures one of the markets. periodic funds.to provide hoped-for diversification thebenefits. markets—such Just look as the at appeal the bigof value losses reminders suffered of bythe benefitssome notable of diversification. hedge The situation hasn’t been much better and momentum investing—into winning There has been a view since the market amongfunds. liquid • The alternatives, situation orhasn mutual’t been funds much quantitative better among strategies liquid for institutional alternatives, and orbottom mutual in funds2009 that thatFrom all useleft: you Davidhedge needed Kabil- fund was that use hedge fund strategies such as retail buyers. the S&P 500 index,”ler, says Cliff David Asness, Kabiller, and a mergerstrategies and suchconvertible as merger arbitrage, and convertiblelong/ Nearly arbitrage, all of AQR’s long/short liquid-alt equity, mutual and foundingtrend-following principal Johnofin thefutures Liew 18-year-old founded markets. firm, AQR 18 years ago to put their academic in- Fromsights left: to the David test. Kabil- AQR’s ler,liquid Cliff alternative Asness, and mu- Johntual funds Liew foundedare among AQRthe best 18 years available. ago to put their academic insights to the test. AQR’s liquid alternative mutual funds are among the best available. nch of aca- AQR and the Competition winner. AQ R Capital institution quantita- AQR’s liquid-alt funds, upper table, stack up well against six large rivals, lower table. vestment During the past year, three AQR funds have double-digit gains, way ahead of the S&P 500. AQR’s ap hat seeks Because of nance and ''*' *,&"' sells its liq value and ," ! & )"#* $& +& & financial a nch of aca- winner. AQ AQR and the Competitionantitative " ,*,&' *&*/ their '9,% own beat ,0+ and 4,+fulfill the /,9+ promise ,5+ of funds dire R Capital institutiodelivering nuncorrelated returns that will buyers. , **&*/ *&"*- 5, 9,9 ,4 0, 1 Fidelity, bu quantita- AQR’s liquid-alt funds, upper table,ual stack funds up well against six large rivals, lower table. diversify a traditional portfolio.” of $1 millio During the past year, three AQR funds have double-digit */ gains, &! way ahead *&"*- of the S&P 500. Affiliated 5,0 9,%Managers ', Group 1 (AMG), 1 vestment uding the AQR’s ap 401(k) plan hat seeks #"#&* %,*/ Becausewhich holds 9,/ of stakes !', in '', more 1than 30 invest 1 - ion AQR ment managers, including Harding Lo- brings gro nance and AQMIX), ''*' -&' &*&*,&"' sells its 9,0 liq !', !0,' !4, !', quarters fo value and ," ! & )"#* $& +& & financialevner and a Yacktman Asset Management, y, against %,*/ & * ,*& owns an 9, undisclosed ',/ '/, minority 1 interest 1 in it calls AQ antitative " ,*,&' *&*/ '9,% ,0+ 4,+ /,9+ ,5+ funds dire s 500 and AQR. The firm is among the largest and The ext buyers. Fidelity,''*' bu *,&"' , **&*/ *&"*- ndex over," !5, 9,9 ,4 0, 1 &most )"#*successful managers $& in +& AMG’s & port- plexity of ual funds of $1 millio */ &! *&"*- “This has 5,0 9,% ', 1 1 folio. AQR are uding the "# # '# ,* *,&" *&*' 401(k)AQR %,' pla managesn !4,'+ a ! , +range of 5,'+ funds 1using #"#&* %,*/ the bene- 9,/ !', '', 1 1 versions o ion AQR *./ bringsdifferent ,9 gr strategieso !4,9 !',across multiple 5,/ 4,5+asset -&' &*& en a view 9,0 !', !0,' !4, !', amounts of AQMIX), at all you #'*#" &*"&' #"(#&* '& quartersclasses—stocks, 0, fo ! , bonds, ! , commodities, , 0, and dividuals ca %,*/ & * ,*& 9, ',/ '/, 1 1 currencies. It often uses futures, swaps, and y, against ys David && "-'*#& it calls , AQ !',5 !4,5 ',' ', as universi s 500 and otherThe derivatives ext to implement its strategy. 8-year-old !#"''*' #"#&**,&"' AQR has ,' identified ! , what !0,% it considers , , to be tions, to div ndex over ," ! other two & )"#* $& +& & plexity of with a 10% “This has '*#" *&"*- , **&*/ AQRfour winning ,' are ! , investment !4,' styles—value, 1 1 mo- "# # '# ,* *,&" *&*'and John %,' !4,'+ ! , + 5,'+ 1 mentum, defensive, and what the firm calls “AQR h the bene- &3! 3 . & 51'%1'0, 4! $ !7- -36-$. - $$6#"8,versions 1 &3 ((#"#,o &6- &-$"$ .3- *./ ,9 !4,9 !', 5,/ 4,5+ carry. The last can involve currency-mar- with a sys en a view amountsket trades, of in particular shorting low-inter- #'*#" &*"&' #"(#&* '&since the 0, ! , ! , , 0, we can de at all you key test of whether the promise of delivering uncorrelateddividualsest-rate currencies returnsca that and willbuying di- currenciesdence,” says Kevin G , !',5 !4,5 ',' ', ys David && "-'*#& versification and pro- versify a traditional portfolio.”asin universcountriesi with high inflation-adjustedWestborough, Mass. 8-year-old !#" #"#&* d-alt funds have been ,' ! ,Affiliated !0,% Managers , , Grouptions,yields. (AMG), to “Defensive” di whichv holds involves stakes higher-qualityindex fund of the alt other two with a 10% '*#" *&"*- , **&*/nting returns during ,' ! , in more !4,' than 30 1 investment 1 managers,investments. including Momentum Harding investing, or Grimesbuy- uses seve and John ing“ AQRrising hassets and shorting poor per- &3! 3 . & 51'%1'0, 4! $ !7- -36-$.s, to - boot. $$6#"8, 1 &3 ((#"#,Loevner and Y&6-acktman &-$"$ Asset.3- Management, owns an undis- aged Futures Strat withformers, a sy iss sometimes derided as a foolish funds has been good closed minority interest in AQR. The firm is among the futures markets glob since the based in Greenwich, Conn. The other two portfolios. Academic work is just the tip of wemechanistic can de strategy, but AQR’s research and besting many big largest and most successful managers in AMG’s portfolio. having a piece of the key test of whetherfounding principalsthe promise are Cliffof delivering Asness and uncorrelated the iceberg,” returns says thatLiew. will di- dence,” sayssuggests Kevin that G it’s a winner. AQR’s liquid-alt as happened this year AQR manages a range of funds using different strate- some sense,” he says versification andJohn pro- Liew. versify a traditional portfolio.” AQR is the largest managerW inestborough, the funds Mass are similar. to its institutional-invest- hat we say,” says As- gies across multiple asset classes—stocks,ment strategies. bonds, commodi- One problem wit d-alt funds have Indeed,been the Affiliatedstock market Managers selloff since Group fragmented, (AMG), which growing, holds stakesand controversialindex fund of the alt the start of this year has shapede, butup as I a want liquid-alt to be market.ties, andThe firmcurrencies. had $17 billionIt often uses futures, swaps, and Grimes says some riv nting returns during in more than 30 investment managers, including Harding Grimes uses seve key test of whether liquid alts canesn ’tdeliver prove a inconcept, liquid-alt otherassets, derivatives plus a smattering to implement of AQR’s its strategy. approach AQR can has be iden- hard tocharge under- two or three s, to boot. Loevner and Yacktman Asset Management, owns an undis- aged Futures Strat the promised diversification and protectmore times.” in- long-only strategies,tified what with ittotal considers fund assets to bestand. four Because winning of investmentthis—and to deter hot funds has been good closed minority interest in AQR. The firm is among the futures markets glob vestors during downturns. Liquid-alts 52 Ph.Ds,funds includingof $23 billionstyles—value, at year-end 2015. momentum, It is the defensive,money—the and firm what sells the its firmliquid-altOn funds the equity side and besting many big largest and most successful managers in AMG’s portfolio. having a piece of the have been rightly criticized foru generallydent and teachingliquid-alt industry’scalls carry. biggest The grower, last can with involve almost currency-market entirely through trades, financial advisors.up to 1,700 global s as happened this year AQR manages a range of funds using different strate- some sense,”Retail he buyerssays can access the funds directly disappointing returns during theFama, recent a N obel$7 laure-billion of ininflows particular since the shorting start of 2015. low-interest-rate currencies and based on an array o hat we say,” saysbull market—andAs- gies across high fees, multiple to boot. asset classes—stocks,The industry bonds, totals commodi-$170 billion, excludingOne problemthrough wifundt supermarkets like Fidelity, man, is known as the buying currencies in countries with high inflation-adjusted they include price/ear e, but I want toThe be performanceties, and ofcurrencies. AQR’s liquid-alt It often go-anywhere, uses futures, unconstrained swaps, and bond Grimesfunds. saysbut some direct ri vinvestments involve a minimum The AQR academics yields. “Defensive” involves higher-quality investments. strength, and stock esn’t prove a fundsconcept, has beenother good derivatives so far this to year, implement with its“AQR strategy. is the AQR clear has leader iden- in deliveringcharge two of or $1 three million. Investments through advi- nce faculty at major Momentum investing, or buying rising assets and shorting fundamental-researc more times.”most in thetified black whatand besting it considers many bigto bealternative four winning strategies investment to retail investors,” sors and 401(k) plans have no minimum. essed to develop and poor performers, is sometimes derided as a foolish mecha- research, and never t s 52 Ph.Ds, includingrival funds. “Whatstyles—value, has happened momentum, this year defensive,says Morningstar and what analyst the firm Jason Kephart.On the equityAQR regularlyside brings groups of financial is a nice data point that we are doingan generate what “Itmarket- has developednistic strategiesstrategy, thatbut moveAQR’s to researchadvisors suggeststo its headquarters that it’s fora a approachdaylong that differs udent and teaching calls carry. The last can involve currency-market trades, up to 1,700 global s we say,” says Asness. “I’m proudrised of whathow funds, such Fama, a Nobel laure- in particular shorting low-interest-rate currencies and based on an array o we’ve done, but I want to be intellectuallyemic into tal, Bill Ac man, is known as the buying currencies in countries with high inflation-adjusted they include price/ear honest. One data point doesn’t proves involves a con- Delivering Diversification agement, The AQR academics yields. “Defensive” involves higher-quality investments. strength, and stock cept, and I look forward to proving building it many Loeb. The nce faculty atmore major times.”Momentum investing, or buyingAQR’s rising funds assets have and done shorting an admirablefundamental-researc job of offering the diversification that buyers seek. the tip of “high conv essed to developAQR’s and staffpoor of performers, more than is600 sometimes boasts Allderided have been as abeating foolish major mecha- world indexesresearch, since and U.S. never stocks t peaked in July. companies an generate market-52 Ph.Ds, includingnistic strategy, Asness, whobut wasAQR’s Eu- research suggests that it’s a approach that differs gene Fama’s student and teachingagmented, assis- “We ha rised how funds, such arket. The not high co emic into tant at the University of Chicago. Fama, tal, Bill Ac a Nobel laureate and former studentts, plus ofa Jacques F s involves Delivering Diversification agement, Milton Friedman, is known as thetotal father fund investmen building Loeb. The AQR’sof efficient-markets funds have done theory. an admirable The ItAQR job is of theac offering- the diversification that buyers seek. The ide the tip of All have been beating major world indexes since U.S. stocks peaked in July. “high conv ademics would stack up well againsth $7 billion the ! $ $ ! stock with finance faculty at major universities. This companies e industry ! ! $ ferred sho agmented, brainpower is harnessed to develop and ex- ! $ $ " “We ha re, uncon- " with a poo arket. The ecute quantitative strategies that can gen- not high co find these ts, plus a erate market-beating returns. “You would Jacques F %% g alterna- # way. total fund be surprised how much effort it takes to investmen Morning- Another It is the turn the academic into the practical. Mak- The ide # ing money for clients involves dcontrollingeveloped patience be h $7 billion ! $ $ ! stock with costs, managing risk, and buildingand fulfill real # dollars a ye e industry ! ! $ ferred sho re, uncon- ! $ $ " " with a poo %% find these g alterna- # way. Morning- # Another developed patience be and fulfill # dollars a ye series of presentations that it calls AQR the centerpiece of which is a sophisticated In keeping with its academic tenden- Symposium. electronic trading system designed to nav- cies, AQR published a paper in late 2014, “A The extra education is useful given igate stock markets dominated by high-fre- Century of Evidence on Trend-Following the complexity of its products. Among the quency traders. The firm is willing to wait Investing,” which found that a trend-tim- wrinkles at AQR are what it calls high- and for its price to establish a position, rather ing strategy had “strong positive returns low-volatility versions of some funds, which than chase markets. With so many invest- and realized a low correlation to traditional use varying amounts of leverage. The liq- ments, AQR would rather pass on an indi- asset classes” dating back to 1880. While uid-alt pitch is that individuals can access vidual security than get it at a bad price. It noting the long-term appeal of trend-fol- the same types of investments as university will buy another, instead, that matches its lowing, AQR acknowledged in the paper endowments and other big institutions, to criteria at a better price. that the strategy hasn’t had such strong re- diversify equity-heavy portfolios, typically turns since 2008, perhaps due to the large with a 10% to 20% allocation to liquid alts. Asness, Kabiller, Liew, and others founded amount of money chasing the strategy, as “AQR has replaced all-star guru man- AQR in 1998. A decade later, the firm well as choppier markets. agers with a systematic and consistent ap- launched a group of mutual funds using Reflecting what Asness would call in- proach that we can deploy in client accounts the same strategies it was employing for tellectual honesty, AQR stated that these with confidence,” says Kevin Grimes, pres- institutional clients. Asness calls AQR “a factors raise “questions regarding the ident of Grimes & Co., a Westborough, global institutional manager that happens future outlook of the strategy.” Managed Mass., investment advisor. “It’s almost an to do liquid alts.” futures strategies work best when there index fund of the alternatives space.” Outsiders say the firm is excellent at are strong trends; volatile markets are Grimes uses several AQR funds, includ- marketing and product development. It tough. The five-year annualized return of ing AQR Managed Futures Strategy, which hired a finance professor from Harvard AQR Managed Futures Strategyis OK, not seeks to ride trends in futures mar- great, at 4.2%. Last year, the fund kets globally. “There are always was helped by the long downward trends, and having a piece of the Steady Asset Growth trend in oil but hurt by choppy U.S. portfolio in managed futures makes equity markets. The fund was up some sense,” he says. AQR introduced its first liquid-alternative mutual funds in 2008. 4.6% in 2016 through Feb. 19, ac- One problem with many futures In seven years, the firm has grown into the largest player. cording to Morningstar. funds is high fees. Grimes says some The firm’s next-largest funds, rivals, including expensive funds of the $2.8 billion AQR Multi-Strategy funds, charge two or three times as Alternative (ASAIX) and the $2.6 much as AQR. billion AQR Style Premia Alterna- tive (QSPIX) were flat and up 0.9%, On the equity side, AQR constructs respectively, in the same period, ac- portfolios containing up to 1,700 cording to Morningstar. global stocks selected by computer The firm’s smaller equity-only models, based on an array of finan- funds—AQR Equity Market Neu- cial measures. Among others, they tral (QMNIX) and AQR Long-Short include price/earnings ratio, price/ Equity (QLEIX)—have had excel- book, balance-sheet strength, and lent performance in the past year, stock-price momentum. The firm with gains of 17.5% and 11.8% re- has no fundamental-research ana- spectively, versus a 9% drop for the lysts, doesn’t look at Wall Street research, Business School, Gregor Andrade, more S&P 500. It is hard to find many sizable and never talks to corporate management. than a decade ago and rather than place equity-oriented hedge funds with similar It’s an approach that differs markedly him in portfolio management, where many performance. from most big-name hedge funds, such as finance academics end up, put him in sales. Not everything is working. The AQR David Einhorn’s Greenlight Capital, Bill Asness and his team rightly thought an ar- Diversified Arbitrage fund (ADAIX) is Ackman’s Pershing Square Capital Man- ticulate finance professor would do better off 1.5% in 2016 and has negative annu- agement, and Third Point, managed by than a slick marketer, and strengthen the alized returns of 1.5% over the past five Dan Loeb. These funds are best known for firm’s international sales efforts. years. That fund uses several strategies, large, “high conviction” stakes in a small The AQR Managed Futures Strategy including merger arbitrage, convertible ar- number of companies. seeks to latch on to trends—both up and bitrage, and so-called event-driven strate- “We have high conviction in the process, down—in over 100 markets around the gies such as corporate spinoffs. but not high conviction in any particular world, in four asset classes: stocks, bonds, Asness is a critic of the hedge fund stock,” says Jacques Friedman, the head commodities, and currencies. “Put simply, industry, arguing that “they don’t hedge of AQR’s equity investment group. we’re looking for markets going from good enough and they charge too much.” With The ideal AQR equity is a cheap, to great, or bad to worse,” says Yao Hua its liquid-alternative mutual funds, AQR high-quality stock with strong price mo- Ooi, one of the fund managers. believes it has addressed the issue by con- mentum, and a preferred short is an expen- The advantage of the strategy, he says, structing diversified portfolios, often with sive, low-quality stock with a poor chart. is that it is uncorrelated with other asset an equal number of longs and shorts that The challenge, of course, is to find these classes, and “has the most consistently have low, zero, or negative correlations with securities and to do so in a systematic way. strong performance in equity bear mar- the stock market. It also charges reason- Another differentiator is trading—and kets.” That is when diversification matters able fees, at least relative to other liquid-alt the patience behind it. AQR spends tens of most, as was the case in the third quarter managers and most hedge funds. There millions of dollars a year on its technology, of last year and the early part of this year. are no incentive fees or sales charges. The retail class of the AQR Managed Futures little harder for us and a little worse for wouldn’t want an alternatives portfolio of Strategy fund charges 1.5% annually, and clients.” just AQR funds,” he says. “They tend to do the AQR Multi-Strategy fund, 2.2%, better The risk level in some funds might have well or poorly at the same time.” than the 2-and-20 structure—2% fees and to be dialed back, damping potential re- The AQR Multi-Strategy Alternative 20% of profits—of many hedge funds. turns. fund has a “soft close,” and the AQR Style Asness and other AQR executives stress Premia will move to a soft close on March Asness also is active in politics. He is a that the proposal is merely that. Industry 31, although new investors will be allowed supporter of Sen. Marco Rubio, and has comments are due in about a month, and into the funds as long as their advisor has a lively Twitter account (@Cimmerian999) firms that run liquid-alt funds are apt to been on the AQR platform. in which he has taken on Republican pres- argue that the proposed rules would hinder Reflecting the quirky nature of AQR, idential front-runner Donald Trump, call- funds designed to provide diversification the firm hosted a lunchtime lecture for ing out what he says are Trump’s “fascist benefits to investors. A new SEC rule could promises of greatness.” He recently teased be a year or more away, and it’s unclear employees earlier this year by Toby Mos- Trump, tweeting, “I wish I had Trump- what form it will take. kowitz, a University of Chicago finance level accomplishments. I’m still stuck on professor and author who “contributes to wife 1, bankruptcy 0, political philosophy The AQR Multi-Strategy fund offers ex- research on asset pricing and investment 1, and hair God gave me.” posure to nine hedge fund strategies, in- issues related to domestic and interna- AQR has garnered what amounts cluding convertible-bond arbitrage, long/ tional strategies,” AQR says. to high praise from Vanguard Group’s short equity, fixed-income relative value, The lecture topic: “How Luck Fools In- founder and indexing champion Jack Bo- managed futures, and global macro. The vestors, Baseball Umpires, Asylum Judges, gle, who has said that when it comes to AQR Style Premia Alternative fund uses and Even Dating.” Among the perceptions hedge funds, “AQR’s strategy is the one I the four key investment characteristics— that Moskowitz sought to debunk was the hate the least.” Bogle, now 86, developed value, momentum, defensive, and carry— idea of a “hot hand” in basketball. The odds and championed Vanguard’s low-fee equity across stocks, bonds, commodities, and of a player making a basket in a game have index funds that have exploded in popular- currencies. more to do with his season-long shooting ity and put pressure on traditional actively Both funds have seen strong perfor- percentage than whether he has made managed mutual funds. mance since the stock market peaked or missed several shots in a row, he said. AQR and other liquid-alt managers face in July, and in the past 12 months. The Likewise, he dismissed the idea that hot a potential problem if the Securities and Multi-Strategy fund and Style Premia teams in the National Football League with Exchange Commission decides to imple- funds are up an impressive 8.3% and 15.5%, ment recently proposed rules that would respectively, in the past year, making them strong late-season records do better in the limit leverage in mutual funds. Most of the top performers among the 20 largest playoffs. A better guide to playoff success AQR’s liquid-alternative funds have offset- liquid-alt funds. is a team’s full-season record, his research ting long and short positions. To enhance Morningstar’s Kephart says AQR funds demonstrated. returns, the firm uses financial leverage have low correlations with financial mar- The lecture touched on what AQR is that could be curbed by the SEC. “We ab- kets, but higher correlations with one an- good at—separating perception from real- solutely can live with it, but it wouldn’t be other since there often are overlapping ity via statistical analysis. That same ap- optimal,” Asness says. “It would make it a strategies in various AQR funds. “You proach is paying off with its investments.

The quoted statements by anyone from AQR in this article are the opinions of AQR as of the date the article is written. All information is historical and not indicative of future results and subject to change. Readers should not assume that an investment in the securities mentioned was or should be profitable in the future. This information is not a recommendation to buy or sell. Past performance does not guarantee future results.

The S&P 500 Index is the Standard & Poor’s composite index of 500 stocks, a widely recognized, unmanaged index of common stock prices. The MSCI World Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of the developed markets. The MSCI Emerging Markets Index is designed to measure equity market performance in global emerging markets. Investments cannot be made directly in an index. MSCI and MSCI Index are service marks of MSCI Inc. and have been licensed for use by DBX. The Funds are not sponsored, endorsed, issued, sold or promoted by MSCI Inc. nor does this company make any representation regarding the advisability of investing in the Funds. Index data source: MSCI Inc.

An investment in these Funds involves risk, including loss of principal. The Funds are not suitable for all investors.

The use of derivatives, forward and futures contracts, and commodities exposes the Funds to additional risks including increased volatility, lack of liquidity, and possible losses greater than the Fund's initial investment as well as increased transaction costs. Concentration generally will lead to greater price volatility. These Funds enters into a short sale by selling a security it has borrowed. If the market price of a security increases after the Fund borrows the security, the Fund will suffer a potentially unlimited loss when it replaces the borrowed security at the higher price. Short sales also involve transaction and other costs that will reduce potential Fund gains and increase potential Fund losses. These Funds may not be a non-diversified fund. Because a fund may invest in securities of smaller numbers of issuers, a Fund may be more exposed to the risks associated with and developments affecting an individual issuer than a fund that invests more widely, which may, therefore, have a greater impact on the Fund’s Performance.

The AQR Diversified Arbitrage Fund seeks long-term absolute positive returns. The AQR Equity Market Neutral Fund seeks positive absolute returns. The AQR Long-Short Equity Fund seeks capital appreciation. The AQR Managed Futures Strategy Fund seeks positive absolute returns. The AQR Style Premia Alternative Fund seeks positive absolute returns. The AQR Multi-Strategy Alternative Fund seeks positive absolute returns.

Investors should carefully consider the investment objectives, risks, charges and expenses of the Funds before investing. To obtain a prospectus containing this and other important information, please call +1.866.290.2688 or visit www.aqrfunds.com to view or download a prospectus online. Read the prospectus carefully before you invest. There are risks involved with investing including the possible loss of principal. Past performance does not guarantee future results. AQR Funds are distributed by ALPS Distributors, Inc. [AQR005124 Exp: 6/30/2017]

An investment in these Funds involves risk, including loss of principal. The Funds are not suitable for all investors.

Performance Summary 6/30/2016 Ticker Quarter YTD 1Yr 3Yr 5yr Ann Since Inc Inception Date AQR Diversified Arbitrage Fund ADAIX 0.99% 0.11% -4.67% -3.16% -1.01% 1.24% 1/16/2009 Merrill Lynch 3 Month T-Bill Index 0.07% 0.15% 0.19% 0.09% 0.09% 0.12%

AQR Equity Market Neutral Fund QMNIX -1.71% 0.26% 12.94% 13.70% 10/7/2014 Merrill Lynch 3 Month T-Bill Index 0.07% 0.15% 0.19% 0.12%

AQR Long-Short Equity Fund QLEIX -1.28% 1.73% 14.03% 15.22% 7/16/2013 (0.5 * MSCI WORLD) plus (0.5 * T Bills) 0.54% 0.51% -1.04% 2.87%

AQR Managed Futures Strategy Fund AQMIX 1.76% 2.16% 4.69% 6.55% 4.62% 3.77% 1/5/2010 Merrill Lynch 3 Month T-Bill Index 0.07% 0.15% 0.19% 0.09% 0.09% 0.10%

AQR Style Premia Alternative Fund QSPIX 0.00% -0.39% 9.89% 8.89% 10/31/2013 Merrill Lynch 3 Month T-Bill Index 0.07% 0.15% 0.19% 0.09% AQR Multi-Strategy Alternative Fund ASAIX -1.76% -2.66% 6.02% 5.19% 3.55% 7/18/2011 Merrill Lynch 3 Month T-Bill Index 0.07% 0.15% 0.19% 0.09% 0.09%

As of the latest Prospectus, the gross expense ratios for the Class I shares of ADAIX, QMNIX, QLEIX, AQMIX, QSPIX, and ASAIX, are expected to be 2.58%, 2.22%, 1.91%, 1.22%, 2.35%, and 2.46%, respectively. The performance data quoted represents past performance. Past performance does not guarantee future results. Investment returns and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Call 1-866-290-2688 or visit www.aqrfunds.com for current month-end performance. The Merrill Lynch 3-Month Treasury Bill Index consists of U.S. Treasury Bills maturing in 90 days

Cliff Asness, David Kabiller, and Yao Hua Ooi are registered representatives of ALPS Distributors, Inc.