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. (over please) THE PUBLISHER’S SALE OF THIS REPRINT DOES Not CONSTITUTE OR IMPLY ANY ENdoRSEMENT OR SpoNSORSHIP OF ANY PRODUct, SERVICE, COMPANY OR ORGANIZATION. Custom Reprints 800.843.0008 www.djreprints.com DO NOT EDIT OR ALTER REPRINT/REPRODUCTIONS NOT PERMITTED 52518 February 29, 2016 BARRON S S5 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 in- sights to the test. AQR’s liquid alternative mu- tual 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 asI awant 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