What’s Wrong With AQR (Part III)Guest Post
We’ve covered AQR’s eponymous managed futures product before, asking in April of 2017: What’s Wrong with AQR and again in March of 2019: What’s Wrong with AQR (Part II), because when you’re the elephant in the room, well – people want to know what if you’re playing nicely or shattering the dinnerware. And, well, when you’ve literally lost more assets (about $9 Billion) than all but a few shops have ever even managed, well – it begs the question of what is happening.
You have to Perform
The quick and dirty answer is that you have to perform. Both the fund itself, and the fund category! You have to look good on both an absolute and a relative basis. AQR is lacking across all of these. For starters, it has lost about a quarter (-24% drawdown) of its equity peak from April of 2015 (absolute return fail). Of course, assets in the fund peaked about a year later as investors chased performance. Next, it is essentially flat over the past 5 years (absolute return fail), while the S&P has returned about 46% over that same time.
And finally, perhaps most importantly of all, it hasn’t been able to outperform its peers. Our proprietary ranking model measures alternative investments in both private fund and mutual fund wrappers, and has AQR’s managed futures mutual fund AQMIX with a ranking of just 1 star out of 5, finding it in the bottom quintile of our rankings (which consider risk adjust returns and time weighted statistics). Said another way, when comparing AQMIX across multiple time frames, return metrics, and risk measures – 4 out of 5 programs in our database rank better than it. Here’s a YCharts chart again showing that graphically, with AQR plotted versus Goldman, Natixis, and Pimco’s managed futures offerings. They are all losing the war, as well, with the overall asset class suffering as volatility has gone on an extended vacation, but they are winning the battle vs AQR in terms of relative out performance, with double digit returns over the past five years while AQR is in the red.
Why is it under performing its peers? Well, again, that size factor is definitely an issue, with AQR unable to participate in a meaningful way in markets that have moved this year (like Hogs and Corn). Their footprint also can make market impact an issue, bringing to light the need for everyone to use automated execution algorithms as a new best practice. And it can’t be easy to have to unwind $9 Billion of positions without negatively impacting the one’s you still hold. What we also see, however, is a weird sort of volatility profile where AQR tends to mirror the vol of its peers on the downside, but have less volatility on the upside. Meaning they all tend to lose about the same, but when they are all winning, the others are winning more. Everyone else tended to do better in the slow crawl upwards of 2017, perhaps pointing to a long bias among others? But if that’s the case, then why was there another divergence during the big stock sell off in December 2018, where AQR didn’t capture as much of the down move in US stocks as the others? Maybe/probably a little bit of all of the above is happening.
Now, there’s still $5 billion in the program, which is nothing to shake a stick at, and which may help them get back on solid footing. But there’s still better choices out there for our dime, mainly in the private fund space, but some in the mutual fund areas as well. Call us at 855-726-0060 to talk through possible AQR replacements/complements for your portfolio.
Article by RCM Alternatives