Managed by CNH Partners, an affiliate of AQR, the fund is directed by co-founders Todd Pulvino and Mark Mitchell. The two began working together in 2000, when Pulvino was a professor at Northwestern University and Mitchell a professor at the University of Chicago.
Early on, they did a joint venture with the “AQR guys” who were former UC doctoral students. They launched their fund — to be focused on merger arbitrage — on Sept. 1, 2001, and were about 75% invested with seed capital when the planes hit the World Trade Center on Sept. 11.
“Of course the markets closed, and the U.S. economy went into a recession. And there were no mergers, so it was hard to be in the merger arbitrage orbit,” Pulvino said. They had two bad choices: Double down and put all the money into the few mergers there were, or put half of their assets in cash, which is what they did.
If there was a silver lining to that awful event, it forced the team to look beyond the merger arbitrage strategy. “It caused us to recognize early that a multi-strategy approach is much better than a siloed approach,” he said, so they added convertible arbitrage to their toolbox. “
The thought was, when there are no mergers, then convertibles typically are very active,” he explained. Then, adding event-driven strategies and special-purpose acquisition companies, or SPACs, to the mix, they launched the AQR Diversified Arbitrage Fund in 2009.
As the Envestnet analysts observed, unlike its liquid alt peers, the AQR/CNH method of using multi-strategies “gives them the flexibility to rotate and shift investments across different strategies in reaction to different market environments, so they can capitalize on the best investment opportunities available in the marketplace.”
That’s why, Pulvino said, “What we did in 2020 was really a reflection of all [our prior work]. So what happened in 2020 was actually partly due to our experience in 2008 and the financial crisis. In 2008, many securities traded cheap to theoretical value. [But] I think the best risk-adjusted trade I’ve ever seen — and it’s really because the risk was zero — was SPACs in the financial crisis.”
Back then, SPACs were yielding a 10% to 12% return, with little or no risk, and Pulvino and Mitchell became “massive buyers of SPACS,” Pulvino said: “We would buy up to 20% of one SPAC … and we would build portfolios of these SPACs. Since then, we’ve continued to build diversified portfolios of SPACs.”
Also in 2020, the convertible bond market dislocated, and bonds were cheap. “In March last year, a lot of people were massive sellers of convertible bonds, both in the secondary and primary market,” he explained. “We’ve been down this road four or five times before in converts. So companies were issuing these bonds, and we were buying them.
“Various things can happen to a convertible bond investment, but they ended up richening and paying a nice return,” Pulvino added. “So between SPACs and convertibles, that generated the return. It brought together all the little things we’ve learned over the past 15–20 years. It’s going all the way back to the plane, the World Trade Center. There were no mergers after March , but fortunately, we have this multi-strategy fund.”