AQR Capital Management, LLC, has launched a new mutual fund, the AQR Risk Parity Fund (AQRNX, Class N Shares). Classified as an Alternative Asset Fund on the AQR Funds website, the fund’s “Risk Parity approach to asset allocation seeks to balance the allocation of risk across four major risk sources: equity risk, fixed income risk, and credit/currency risk,” the website notes.
The new mutual fund is “very, very similar to a private fund we run,” wrote Clifford Asness, a founding principal of the Greenwich, Conn. firm, in an e-mail interview. He adds, “we don’t really think of it as a hedge fund; it’s long only and fixed fee, and lower fee than hedge funds; we feel strongly that a hedge fund should be shorting things or otherwise reducing it’s net long exposure which this fund does not do; rather we think of it as an alternative (to overuse that word) and superior way to get general market exposure as compared to say the traditional 60/40 stocks/bonds allocation.”
“We believe the Fund attempts to draw on Modern Portfolio Theory in three ways: employing a broad investment opportunity set, maximizing diversification, and utilizing leverage to manage risk,” according to the fact sheet for the fund. The fund uses as its benchmark 60/40 mix of “60% S&P 500 Index / 40% Barclays Capital Aggregate Bond Index,” according to the website.
So what kind of returns does AQR expect to see using the “risk allocation” strategy instead of asset allocation?
Asness wrote: “We could say that the expected risk adjusted excess return is about 50% higher than a standard 60/40 allocation (so if for 10% volatility we expect 60/40 to beat cash by 5%, we’d expect our risk parity fund to, over the long-term, win by 7.5% as we take fairly similar volatility to 60/40; we also expect the draw-downs to be somewhat less severe).”
Asness added that in terms of where this would fit into an investors portfolio, “we think our fund takes comparable risk to a traditional 60/40 stocks/bonds allocation, so wherever that 60/40 allocations fits in, we think (of course!) that we’d fit in better.”
AQR invested $10 million in seed money for the new fund, according to the announcement on Monday. As a mutual fund, investors in the “N” shares have a $5000 investment minimum and a net expense ratio of 1.20% (capped until “at least May 2012”) the fund’s fact sheet says. There is a 25 basis point 12b-1 fee, but no up-front load. “I” shares have a $1 million minimum investment, no 12b-1 fee and an expense cap of 95 basis points.
Asness was a speaker at the Morningstar Investor Conference in June and spoke with AdvisorOneWealth Editor-in-Chief Kate McBride. To read that interview, please go to “Morningstar Conference: Asness Speaks Alternative Strategies.”
Asness is a signatory to the Fiduciary Statement from the Committee for the Fiduciary Standard; see “Nobel Laureates Call for Fiduciary Standard.” This editor is a member of that Committee.