Cliff Asness's Alternative Funds Top Rivals With 17% Returns

  • AQR's liquid alt funds attract almost $5 billion in cash
  • Many rival funds lost money amid the volatility of 2015

As stocks and commodities plunged to kick off the new year, Cliff Asness’s liquid alternative mutual funds went the other way -- making money for investors.

That performance extends a winning streak of the so-called liquid alt mutual funds run by AQR Capital Management, which was co-founded by Asness and is best known for its hedge funds. AQR Capital managed the top-performing liquid alt fund in 2015, returning 17.6 percent, according to data compiled by Bloomberg. It’s up 2.6 this year through Wednesday.

Cliff Asness
Cliff Asness
Photographer: Chris Goodney/Bloomberg

The mutual funds, which are designed to mimic hedge fund strategies, became popular after the 2008 financial crisis as investors flocked to vehicles that promised returns with fewer ups and downs than the stock market. While AQR has gathered $16.4 billion into its liquid alt funds, making it the category leader, according to Morningstar Inc., other firms have stumbled. More than half of the roughly 100 alternative funds with at least $250 million in assets lost money last year, according to Bloomberg data.

“AQR is the poster child for a hedge fund firm finding success in mutual funds,” said Bradley Alford, founder of Alpha Capital Funds Management, who owns a number of AQR products for clients. “They are crushing it in an area where others have failed.”

AQR’s strong results have caught the attention of investors, who sent the firm almost $5 billion in cash last year. The $353 million AQR Equity Market Neutral Fund was the top performer in 2015 among the liquid alts, followed by the $594 million AQR Long-Short Equity Fund, which returned 17 percent. Both funds take long and short equity positions.

The $2.6 billion AQR Multi Strategy Alternative Fund rose 9.3 percent in 2015, ranking fourth, and the $2 billion AQR Style Premia Alternative Fund climbed 8.8 percent, seventh best in the group of some 100 funds.

Three of these four AQR funds also gained in the first eight trading days of 2016, even as the Standard & Poor’s 500 Index dropped 7.5 percent. The same group of alternative funds declined an average of 1.3 percent this year, with a majority in negative territory.

Whitebox Shutters Funds

AQR Capital, which manages $141 billion, succeeded in a market that clobbered many of its rivals last year, including Gotham Asset Management and Pacific Investment Management Co., whose liquid alt funds ranked among the weakest performers in 2015. Six categories of alternative funds tracked by Morningstar showed average losses of between 0.1 and 5.1 percent for last year.

Whitebox Advisors, a $3.85 billion investment firm best known for running hedge funds, last month said it would close its three mutual funds -- two of them liquid alts -- after the funds suffered losses and redemptions.

“It’s not as simple as opening a fund and having people flock in,” said Josh Charney, an analyst with Morningstar. “To be successful in this field you have to make a real effort to market your funds and educate the clients.”

Blackstone Group LP is another liquid alt success story. The Blackstone Alternative Multi-Manager Fund returned 4 percent last year, ranking 13th on the list. The firm collected $3 billion in deposits in its liquid alt funds last year, Morningstar data show, bringing their assets to $5.1 billion.

Factor Investing

Asness earned his doctorate in finance at the University of Chicago, where he studied under Eugene Fama, who later won the Nobel Prize in economics for his work on efficient markets.

Like Fama, Asness and his colleagues don’t pick individual securities. Instead they use a quantitative approach to identify certain factors, such as momentum, value and quality, that they believe create outperformance in asset classes over time. Last year, momentum, the notion that rising securities keep rising and falling ones keep falling, was the key driver of returns, said Ronen Israel, a principal at AQR.

“What happens to traditional markets shouldn’t tell you what happens in our portfolios,” he said in a telephone interview from the firm’s Greenwich, Connecticut-based headquarters. “We should be able to do well in different market environments.”

Charney at Morningstar said the 2015 gains at AQR funds may not be repeatable and that three of its four top performers have only been operating since 2013. In the world of liquid alts, investors have shown they will bail out quickly when performance sours.

The MainStay Marketfield Fund, a long-short strategy, saw assets climb to $19.3 billion in 2013 from $882 million in 2011 on the strength of strong returns. The fund lost 12 percent in 2014 and 8.3 percent in 2015, triggering redemptions of $13.8 billion over the two-year period, according to Bloomberg data. The fund had $2.4 billion in assets as of Dec. 31.

Uncorrelated Bets

Israel said educating investors is crucial in making them stick with the funds. AQR writes research papers to explain the role of alternatives, which can provide returns that are uncorrelated with stocks and bonds. 

Once a year, the firm invites financial advisers to the University of Chicago for a seminar billed as “AQR University,” where Asness and other principals speak. Fund buyers tend to be advisers because of investment minimums of $5 million, Israel said.

“The fact that we do so much upfront work with clients means that they understand what to expect when we go through the inevitable tough times,” said Israel.

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