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Preaching the Gospel of Momentum Preaching The The dow jones business and Financial weekly www.barrons.com auGusT 31, 2009 Interview With Cliff Asness and David Kabiller InterviewPrincipals,With%AQR ClifCapitalf AsnessManagementand David Kabiller Principals,Interview WithAQRCliff CapitalAsness andManagementDavid Kabiller Principals, AQR Capital Management PreachingPreaching thetheGospelGospelof Momentumof Momentum byby AndrAndrewewBaryBary QuantitativeQUANTITbyQUANTITAndrATIVEATIVEewINVESTMENT INVESTMENTinvestmentBarySTRATEGIES STRAstrategiesARETEGIESSHROUD-ARE SHROUD- eded ininmysterymystery. Most. Mostinvestorsinvestorsdon’t evendontry’ttoevenunderstandtry to understand arethem, shroudedand many practitioners in mystery.won’t mdiscussost them,investorsfearing them,QUANTITandAmanyTIVE INVESTMENTpractitioners wonSTRA’tTEGIESdiscussAREthem,SHROUD-fearing don’tedthatindoing mysteryevenso couldtry. Most costto theminvestorsunderstandtheir competitivedon them,’t evenedge. tryandto understand manythatOnedoing ofpractitionersthesolargestcouldfirmscost won’tin themthe fielddiscusstheiris AQRcompetitive them,Capital edge. them,Managementand manyof Greenwich,practitionersConn. Foundedwon’t discussin 1998, itthem, fearing fearingOne ofthatthe doinglargest sofirms couldin thecostfield themis AQR Capital Managementthatoverseesdoingmoresothancouldof Greenwich,$20costbillion,themprimarilyConn.theirforcompetitiveFoundedinstitu- inedge.1998, it theirtionalOne investors.competitiveof theAQR,largest edge.whichfirmsstandsinfortheAppliedfieldQuan-is AQR Capital overseestitativeOneResearch, of morethe largestseeksthanto $20usefirmssomebillion, in ofthebestprimarily fieldideas isof for institu- Managementacademic financeofinGreenwich,the real world.Conn.It appliesFoundedits in 1998, it ationalQr Capitalinvestors. managementAQR, which ofstands greenwich,for Applied Quan- titativeoverseesproprietaryResearch,moremodels thanacrossseeksa$20rangetobillion,ofuseassets,someprimarilyincludingof bestforideasinstitu-of Conn.tionalstocks, investors.bondsFoundedand currencies.inAQR, 1998,which it overseesstands morefor Applied Quan- thanacademicBacked $20 bybillion,financea wealthi primarilyinof thehistorical forreal institutiondata,world.the firmIt- applies its titativebelieves inResearch,often-deridedseeksmomentumto useinvesting,some whichof best ideas of alproprietary investors.models aQr, whichacross standsa range forof aassets,p- including stocks,academicfavors buyingbondsfinancestocksandthatincurrencies.havethebeenrealdoingworld.well, rela-It applies its pliedtive to Quantitativetheir peers or the research,overall market, seeksand toavoiding use proprietaryBacked bymodelsa wealthacrossofa rangehistoricalof assets,data, includingthe firm somestocks,those withof bondsbestpoor ideaspriceandmomentum. currencies.of academicAQR financecalls momen- in believestum investingin often-deridedan “undiscovered momentumstyle” and a betterinvesting, which the real world. it applies its proprietary favorscomplementBackedbuyingtobyvaluestocksa investingwealththatthanofhavehistoricalgrowth-orientedbeen doingdata,well,the rela-firm modelsstrategies. acrossThe firm a rangeseeks to ofoverweight assets, cheapincludingsecuri- tivebelievesto theirin often-deridedpeers or the overallmomentummarket,investing,and avoidingwhich stocks,favorsties that buyingbondshave strongandstocks currencies.momentumthat haveand beenunderweightdoing well, rela- thoseexpensivewithonespoorthat pricehave weakmomentum.momentum.AQRUnlikecalls momen- Backed by a wealth of historical data, tivetummost toinvestmentinvestingtheir peersmanagers,an “undiscoveredor theAQRoverallemploysmarket,style”no funda-andand aavoidingbetter the firm believes in often-derided momen- thosecomplementmental withanalystspoortoto covervaluepricecompanies.investingmomentum.Instead,thanAQRit seeksgrowth-orientedcalls momen- tumto hone investing,investingits quantitative whichan models“undiscovered favorsand buyingdevelopstyle” newstocksones.and a better strategies.The firm lastThemonthfirmstartedseeksthreeto overweightmomentum-ori-cheap securi- thatcomplement have beento doingvalue well,investing relativethan to theirgrowth-oriented tiesented thatequity mutualhave funds.strong momentum and underweight Barron’s peers or the overall market, and avoiding expensivestrategies.The first, onesTheAQRfirmthatMomentumseekshaveto(ticker:weakoverweightAMOMX),momentum.cheap securi-Unlike which invests in the third of the 1,000 largest U.S. thosemostties that investmentwithhave poor strongpricemanagers, momentum.momentumAQR employs aandQr underweightno funda- callsstocks momentumwith the best totalinvestingreturn overan “undiscovthe preceding- mentalexpensive12 months.analystsIt oneswill betothatrebalancedcoverhavecompanies.quarterlyweak. Themomentum.Instead,other itUnlikeseeks eredtomosttwohonefunds, style”investmentitsAQR quantitativeandSmall amanagers, betterCap modelsMomentum complementAQRand(ASMOX)employsdevelop to nonewfunda-ones. valuementaland AQR investinganalystsInternational tothancoverMomentum growth-orientedcompanies.(AIMOX),Instead,are it seeks The firm last month started three momentum-ori- Jordan Hollender for tosimilarhone. Theitsfundsquantitativeare up sincemodelstheir inceptionand developbut new ones. strategies.entedtrail theequityoverall themutualmarket. firm funds.seeks to overweight cheapEarlierThe securitiesfirm,ifirst,nJanuarylastAQR , monththethatfirmMomentum havelaunchedstarted strongAQRthree(ticker:Diversi- momomentum-ori-- AMOMX),“A tremendous amount of work goes into our models. If someone mentumentedfied Arbitrageequity and mutual(ADunderweightANX).funds.It focuses expensiveon five onesareas: whichconvertibleinvestsarbitrage,in themergerthirdarbitrage,of thedual-share-1,000 largest U.S. The first, AQR Momentum (ticker: AMOMX),asks why we’re longastock, we would list 17 reasons for it.” Cliff Asness thatstocksclass arbitrage,havewith weaktheclosed-end-fund momentum.best totalarbitragereturn unlikeandover special-mostthe preceding investment12whichmonths.invests iiItmanagers,iiwillin thebe rebalancedthirdaQr ofemploysSPtheACquarterly1,000 SPnoAC largest. The otherU.S. fundamentaltwostocksfunds,with AQRtheanalystsbestSmall tototal coverCapreturn companies.Momentumover the ipreceding(ASMOX)t will be rebalanced quarterly. the other trage, merger arbitrage, dual-share-class iand12nstead,months.AQR it InternationalseeksIt will tobe honerebalanced itsMomentum quantitativequarterly(AIMOX), . twoThe funds,otherare AQR Small Cap Momentum arbitrage, closed-end-fund arbitrage and modelssimilartwo funds,. andThe developAQRfundsSmall neware upones.CapsinceMomentumtheir inception((ASMOX)asmOX)but and AQR International Mo- special-purpose acquisition companies, or trailandtheAQRthe firmoverallInternational last monthmarket. startedMomentum three mo(AIMOX),- mentumare (aimOX), are similar. the funds sPaCs. sPaC shares typically are pur- similar. The funds are up since their inception but mentum-orientedEarlier,inJanuary equity, the mutualfirm launchedfunds. AQRareDiversi- up since “Atheirtr inceptionemendous but trail amountthe chased ofwhenwork they tradegoes at intoa deepour dis- models. If someone fiedtrailthetheArbitrage first,overall AQR(ADmarket. ANX).MomentumIt focuses (ticker:on fiveoverallareas: market. count to their net-asset value. amconvertibleEarlierOmX),,i whichnJarbitrage,anuary invests, themerger infirm thelaunchedarbitrage, third ofAQR dual-share-Diversi-earlier, in January, the firm launched these funds might be unique. We know asks“A tremendouswhy we’re amountlongastock,of workwegoeswouldintolistour17 rmodels.easons forIf someoneit.” Cliff Asness thefiedclass 1,000Arbitragearbitrage, largestclosed-end-fund (ADu.s.ANX). stocks Itwithfocusesarbitrage the beston andfiveAQRspecial-areas: Diversified Arbitrage (aDanX). of no other mutual funds that employ a convertible arbitrage, merger arbitrage, dual-share- total return overii theii preceding 12 months.SP ACit focusesSPAC on asksfive areas:why convertiblewe’re arbilon- gapure stock,momentumwe strategywould or pursuelist multi17- reasons for it.” Cliff Asness class arbitrage, closed-end-fund arbitrage and special- iiiiSPAC SPAC (over please) Th e Pu b l i s h e r’s sa l e Of This re P r i n T DO e s not COnsT i T u T e Or im P ly an y en do r s e me n T Or spo ns O r s h i P Of any Pr O Du ct , se r v i Ce, CO m P a n y Or Or g a n i za T i O n . Custom Reprints (609)520-4331 P.O. Box 300 Princeton, N.J. 08543-0300. DO NOT EDIT OR ALTER REPRINT•••/ REPRODUCTIONS NOT PERMITTED #41267 ! ple arbitrage strategies. the no-loads are research, i would say it is absolutely fun- Asness: it’s having a lousy year. i think available through some fund supermar- damental. very few of the variables in our it’s because of the very sharp stock-mar- kets, including Fidelity’s and schwab’s. model would be called technical, except ket reversal we saw in march going to Barron’s sat down last week with two of maybe pure price momentum. april. momentum bets that whatever has aQr’s principals, Cliff asness and David Kabiller: We have spent millions of dollars been going on will keep going on a little Kabiller, in greenwich. the outspoken as- a year on income statements and balance- more. Over the past 70 years in the u.s, ness gained some attention this year with sheet data on companies. We process that it wins in about two-thirds of the years.ii When his criticism of President Obama after information. We try to isolate those fac- doesn’t it win? Whenever you have sharp the nation’s chief executive had attacked tors that are
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