At Schwab Impact, AQR's Asness Speaks About Alternative Strategies

Parity strategy, which has a long term view, regarding bonds generally, “momentum likes it; valuation dislikes it.” However, with bonds, “there are scenarios where they’re literally the only thing that works”

Alternative Strategies in Mutual Funds

In their foray into mutual funds, Asness explains that AQR tries to bring out “what’s not available yet…a good complement” to what is out there in the mutual fund space.

The Risk Parity strategy is more “long-term…slower changing” while the Managed Futures strategy is more fast-changing.

He is surprised, however, about fees on some strategies. The Managed Futures Fund, Asness says, is a case in point. The firm does “credible, systematic” research, and it “requires a lot of skill to implement” correctly, but they are, he says, “not necessarily geniuses.” But he also wonders why that strategy is so expensive elsewhere. AQR has a 1.50% expense cap on the most expensive class until April 2011 at least. Other funds, he says, charge north of 2%.

The Managed Futures Fund, (AQMNX for N shares) uses a “disciplined trend-following” strategy using quantitative models Asness explains. It can go long or short contracts on futures and other "related” securities for equities, commodities, fixed income and currencies. “Seventy-five percent of the time [AQR] will identify short- or medium-term trends.” The asset allocations are a bit tactical. The risk, or volatility, in the Managed Futures strategy “averages 10%,” he says, but can get higher; they “won’t let it go past” about 13. In watching these trends, Asness notes that there is “10% to 15% more risk [now] than in the beginning of the year. Trends are stronger. If they get insanely good, past two standard deviations [in a] short term move,” AQR will “start to reduce” exposure.

So is the velocity of trends increasing with all of the electronic trading and information? Not necessarily. Spotting the trends is “not about technology.”  Trends are more about investors’ “under-reaction and then over-reaction. It takes time for people to anchor and adjust—it’s not about information—it’s the way people are wired.”