November was a bad month for the hedge fund industry, although most reports indicate the pain was distributed more broadly than in August (readers may recall the quants took some stunning losses that month).
The New York Post reports that one of the once-highly-regarded quant funds, ex-Goldman Cliff Asness’ AQR, continues to have a bad time. It’s November losses bring it to a total decline so far this year of 11.9%.
From the Post:
A giant Greenwich hedge fund continues to get clobbered as volatility whipsaws its computer-generated trading models.
AQR Capital Management’s flagship fund, the $4 billion AQR Absolute Return fund, dropped an additional 5.8 percent in November after a 3.17 percent loss in October. For the year, the fund is down 11.9 percent.
It is a stunning reversal for the formerly high-flying AQR, which boasts of having about $36 billion under management in various quantitative strategies, including just over $11 billion worth of hedge funds…
At one point in July, AQR leaked the fact that it was seriously pondering pursuing an initial public offering, like fellow asset managers Blackstone and Fortress Investment Group.
Needless to say, AQR’s IPO is now a moot point given the mounting losses.
While performance data was not available for AQR’s “long only,” or non-hedge fund-based assets, a recent Pension & Investments interview with AQR co- founding principal Clifford Asness revealed that some of the portfolios had indeed suffered. He also noted that despite the market gyrations, some smaller hedge funds were up 15 percent to 20 percent.
It has been a year unlike any other for AQR and Asness.Accustomed to being included in lists of the most highly compensated hedge- fund managers, the market dislocations in July caused massive – and embarrassing – losses for AQR and Asness.
In July, AQR – which had booked years of double-digit returns since its inception in 1998 – reported that its quantitative strategies were down 13 percent at one point. While the fund later recouped about 50 percent of the losses, it was the first real black eye for the fund that has come to be publicly identified, along with James Simons’ Renaissance Technologies, with computer-generated stock and futures trading.
An AQR spokesman told The Post that the fund would not comment on “market rumors.” He added that, “[AQR’s] management team is proud of its track record in generating returns for investors.”
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I would suggest the recent moves that have hurt AQR and similarly value-oriented, fundamentally-factor-driven strategies, will, in hindsight be seen as “divergent” insofar as their positions are departing further from some intermediate-term equilibrium, rather converging towards the same.
Sure it would be nice to warehouse such “risk” without drawdown, but investors in such strategies would be wise to look forward, rather than backwards, when allocating to these endeavors, and ask their managers to more precisely quantify expected returns (vs. some historical context) given current dispersion in order to try to determine some measure of the prevailing risk vs. reward of the strategies. I believe the comparisons, given honest estimates would be rather compelling in relation to other times and other strategies.
Re Calc Risk: What the FED actually hopes to do is drive risk-free rates so low(on deposits for instance and other credit-worthy investments in these crazy times, like short-term Treasuries) that savers are literally forced back into a search for yield. They want to keep the game going, so time to impose a “tax” on the savers by forcing rates for creditworthy rates below 0!”
-Satchel
Exactly. This will also hold up asset values in bonds, houses and equities in an attempt to prevent the deflationary collapse. This is the playbook written by Bernanke in his 2002 speech and if you want to bet against Pimco, Greenspan(now consulting for Pimco) and the US in general…be my guest. More than likely, you will be on the wrong side of the trade.
Anon of 12:49 PM,
The problem with that strategy is you generate bigger and bigger bubbles. Lenders are effectively lending against inflated collateral, and the assets cannot generate enough income to retire the debt, and in some cases, not enough to service it either. Hyman Minsky has written about this far more eloquently than I.
The flaw in that thinking is if people have come to doubt the value of the assets, no matter how deeply you cut interest rates, they won’t invest. Too many people forget that in the Depression, the Fed DID increase liquidity. They expanded the monetary base, which is what they control directly. But money supply shrank anyhow because no one trusted banks and they pulled their cash out of circulation.
And then you get a Japan situation: the losses of writing down the assets to “fair” value would be so great you have to socialize them. We are doing some of that now as it is. If they system is not permitted to recognize and clear some of the excesses, and instead inflates a bigger bubble, we will eventually have an economic collapse, either a deflationary crisis or sustained inflation to erode the value of the debt. And inflation is destructive to investment and asset values.