Key Takeaways
- • AQR's mutual funds drew more than $25 billion in outflows between January 2017 and August 2023, with total mutual fund assets falling to $26.9 billion from a peak of $51.4 billion, according to Morningstar.
- • A large overweight to value after 2018, expanded by up to 10 percentage points in some strategies from 2019 through 2020, combined with a struggling stock-selection model, drove heavy underperformance; AQR Equity Market Neutral QMNIX lost 38% by December 2020.
- • At least 15 AQR funds saw one or more named portfolio manager departures between January 2020 and September 2023, as the firm pruned its lineup and exited areas such as fixed income.
- • Fifteen AQR liquid alternative and nontraditional mutual funds posted top-quintile results over the three years through September 2023, with outflows moderating and performance stabilizing.
- • Morningstar's lessons center on factor diversification trade-offs, the limits of single-model stock selection, the difficulty of holding complex strategies, and the cost to investors of selling before a rebound.
Summary
Morningstar examines the arc of AQR Capital Management's mutual fund business, which grew from a hedge fund firm founded in 1998 into one of the largest quantitatively driven managers. After losses in 2007 and 2008 tied to the financial crisis, AQR's firm assets were halved by 2009, and the firm turned to alternative mutual funds that year. Global AQR mutual fund assets climbed above $40 billion by 2018, led by strategies such as AQR Diversified Risk Premia and AQR Managed Futures AQMIX. From 2010 through 2017, the firm's mutual funds earned a 1.0 Sharpe ratio on average, according to the article.
The article identifies three trade-offs in AQR's approach. Its funds spread exposure across factors such as value, quality, momentum and sentiment, but those factors can underperform together, and AQR uses one systematic stock-picking model across many strategies, leaving multiple funds exposed at once. The firm can also opportunistically overweight factors based on relative valuation, which reduces diversification. In 2018, value and momentum were both negative contributors in the same calendar year for the first time since 2000, and many funds underperformed in tandem. AQR concluded the value underperformance was a statistical anomaly and increased value-based signals by up to 10 percentage points in some mutual fund strategies in 2019 and 2020.
When value fell further, AQR Equity Market Neutral QMNIX lost 38% by December 2020. Mutual fund assets fell to $26.9 billion from a peak of $51.4 billion, and at least 15 funds experienced named portfolio manager departures between January 2020 and September 2023. AQR exited fledgling areas such as fixed income to focus on core strengths.
Morningstar's takeaways stress that factor diversification is uneven over time, that AQR's struggles cannot be attributed solely to the value bet since stock selection also underperformed, and that complex strategies with proprietary signals create informational gaps that can produce worse investor behavior. The article notes that performance has since improved, with 15 funds in top-quintile territory over three years through September 2023, and that investors who sold before the rebound forwent gains. The views expressed are the author's, not necessarily Morningstar's.
The article identifies three trade-offs in AQR's approach. Its funds spread exposure across factors such as value, quality, momentum and sentiment, but those factors can underperform together, and AQR uses one systematic stock-picking model across many strategies, leaving multiple funds exposed at once. The firm can also opportunistically overweight factors based on relative valuation, which reduces diversification. In 2018, value and momentum were both negative contributors in the same calendar year for the first time since 2000, and many funds underperformed in tandem. AQR concluded the value underperformance was a statistical anomaly and increased value-based signals by up to 10 percentage points in some mutual fund strategies in 2019 and 2020.
When value fell further, AQR Equity Market Neutral QMNIX lost 38% by December 2020. Mutual fund assets fell to $26.9 billion from a peak of $51.4 billion, and at least 15 funds experienced named portfolio manager departures between January 2020 and September 2023. AQR exited fledgling areas such as fixed income to focus on core strengths.
Morningstar's takeaways stress that factor diversification is uneven over time, that AQR's struggles cannot be attributed solely to the value bet since stock selection also underperformed, and that complex strategies with proprietary signals create informational gaps that can produce worse investor behavior. The article notes that performance has since improved, with 15 funds in top-quintile territory over three years through September 2023, and that investors who sold before the rebound forwent gains. The views expressed are the author's, not necessarily Morningstar's.
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