Squeezed between a credit panic and intense volatility in stock prices, some of the most highly regarded hedge fund managers have spilled huge amounts of red ink in the past few weeks. Some of these firms may be shutting down certain strategies while others are trying to use their quantitative models in new ways. Last month we wrote about collateralized debt obligations held by hedge funds and their effect on corporate leveraged loans. This month, let’s look at some specific hedge funds’ reactions to the subprime crisis.
AQR Global Stock Selection High Volatility Fund has been so badly hit by equity market movements that is was down 33% year-to-date as of August 9, according to information obtained by HedgeWorld. The fund has an aggressive investment strategy, as suggested by its name.
AQR Capital Management LLC, based in Greenwich, Connecticut, managed $35 billion in various funds as of early this year and was favored by large institutional investors. The Global Stock Selection High Volatility Fund is only one among a number of AQR products, some of which have conventional strategies.
The firm’s founders, Clifford Asness, Robert Krail, and John Liew, were previously the senior managers of Goldman Sachs Asset Management’s Quantitative Research Group. AQR, which the three men founded in 1998, is modeled on Goldman Sachs, whose own funds have also sustained double-digit losses of late.
AQR’s problems confirm that the general quantitative approach is susceptible to big drawdowns during sharp market turns, as has been long recognized by experienced investors.
Another hedge fund heavyweight that suffered steep losses, Bruce Kovner’s New York–based Caxton Associates LLC, is said to be closing down certain quantitative strategies, though a Caxton spokeswoman declined to comment.
Among other major New York-based managers, the $29 billion multistrategy shop D.E. Shaw & Co. is down as much as 20% in certain portfolios while Tykhe Capital LLC, founded by former D.E. Shaw employees, may have lost 27% year-to-date.