The Quant Who Won't Shut Up

The cover of the November 2010 issue of Bloomberg Markets magazine shows a photo of Cliff Asness, president and managing principal of AQR Capital Management LLC. Photograph: Bill Cramer/Bloomberg Markets via Bloomberg

After losses of more than 50 percent in 2007 and 2008, Cliff Asness of AQR Capital Management is starting new hedge and mutual funds--and sounding off on everything from taxes to Tea Partiers.

Clifford Asness, who runs AQR Capital Management LLC, one of the world's biggest hedge funds, says fellow fund managers gouge their clients by charging exorbitant fees for just tracking the markets. He also takes a dim view of the administration of President Barack Obama, calling his economic team "Cossacks on a shtetl," a reference to the Russian cavalrymen who sacked Jewish villages in Eastern Europe in the 19th century.

The hedge fund manager -- who is both a University of Chicago Ph.D. and a Marvel comic book collector -- is well known for his impolitic outbursts, Bloomberg Markets magazine reports in its November issue.

"What kind of coward doesn't share his views?" asks Asness, 43, as he paces his office overlooking Long Island Sound in Greenwich, Connecticut. "I believe strongly that the world is going on the wrong course."

Asness went the wrong way three years ago. From the start of 2007 through year-end 2008, AQR's flagship Absolute Return fund fell more than 50 percent -- the kind of drawdown that's often a death warrant for a fund. Firmwide assets tumbled to $17.2 billion in March 2009 from a peak of $39.1 billion in September 2007, according to AQR investors.

"I heard the Valkyries circling," quips Asness, who says he identifies with action heroes like Captain America and Spider-Man. "I saw the grim reaper at my door."

Smart Recovery

AQR survived. It did so by launching a campaign of diplomacy with its clients and offering a host of new funds and strategies. Asness's funds have recovered smartly. Though the Absolute Return fund's assets were down to $1.6 billion as of Aug. 31 from a peak of $4 billion, the fund rose 38 percent in 2009 and more than 10 percent through mid-September of this year, investors say.

As a quantitative investment firm, AQR uses algorithms and computerized models to trade stocks, bonds, currencies and commodities. Many quant funds got hit hard in 2007 and then again in the 2008 market crash.

"AQR has to fight against this current that's going against them," says Daniel Celeghin, a partner at Casey, Quirk & Associates LLC, a consulting firm in Darien, Connecticut. "They are one of the few quant firms that have managed to come back."

AQR's $1 billion Delta fund, opened in late 2008, returned 19.3 percent in 2009, an investor says -- beating Hedge Fund Research Inc.'s Fund of Funds Composite Index, which returned 11.5 percent. The fund was up 3.9 percent in 2010 through August versus a 0.3 percent loss for the HFRI index.

Asset Allocation

One version of AQR Global Risk Premium, a $3.9 billion asset allocation fund -- meaning it divides its investments across myriad markets -- surged 21.2 percent in 2009 and was up 17.2 percent this year through August, according to investors.

AQR has also been building a family of mutual funds for retail investors since 2008, with total assets in September of $2.3 billion. Three of them focus on momentum investing -- exploiting the tendency of securities to continue in their most recent trajectories. One invests in futures, and another bets on various kinds of arbitrage. Two trade foreign stocks. The latest, an asset allocation fund based on the Global Risk Premium fund's strategy, rolled out October 1.

The firm markets the funds, which use quantitative models, through financial advisers.

Year to date through August, AQR has added $5.8 billion to its assets, which totaled $26.8 billion by the end of that month, according to investors. "It's extraordinary to have had that kind of drawdown and then see them pull in their belts and come back so strongly," says Tom Healey, founder of private investment firm Healey Development LLC, which invests with AQR.

Suffering Investors

Still, longtime investors in AQR suffered. The devastation of 2007 and 2008 gave the Absolute Return fund a negative record from its 1998 inception to its nadir in the market crash, according to a former employee. AQR declined to provide any fund returns for this article.

In early August 2007, AQR and some other quants found their programs had directed them into many of the same losing stock positions -- briefly costing them billions as markets short- circuited. Most funds quickly bounced back, only to plunge again in 2008 when stock, bond and commodity prices collapsed.

Research firm Lipper Inc., which tracks quant funds, says their number fell to 240 in July from 374 at the end of 2005. From the start of 2005 through June 2010, investment firms actively trading U.S. equities using quantitative strategies had a cumulative return of minus 1.15 percent.

Those using fundamental techniques -- traditional stock picking based on companies' prospects and share prices -- had a cumulative return of 9.51 percent, according to EVestment Alliance LLC, an Atlanta-based research firm.

Four-Day Rout

The August 2007 quant rout unfolded over four days, probably after one or more firms tried to close out some of their positions, according to Andrew Lo, director of Massachusetts Institute of Technology's Laboratory for Financial Engineering, who has studied the quant crash.

On Aug. 6, there was a rush to the exits. Stocks popular with quants collapsed as they sold, while those they were betting against soared as managers scrambled to cover short positions. On Aug. 10, markets rebounded. AQR Absolute Return, which had a peak-to-trough loss of 13 percent in August, finished the month down only 3.4 percent because it stuck with its positions.

The calamity of 2008 was far more wide ranging and enduring. The collapse of mortgage-related assets brought down the stock, bond and commodity markets globally. Absolute Return fell about 40 percent, according to investors. Now, Asness is working overtime to win back investors and make sure his algorithms perform.

Low Fees

One reason some of AQR's funds attract investors is their low fees. The Delta fund offers investors an arrangement in which they pay a 1 percent management fee plus 10 percent of any profits it earns, versus the 2 percent and 20 percent typical of hedge funds. The fee rises or falls depending on how closely the fund tracks its benchmark.

AQR mutual funds charge as little as 0.49 percent, on a par with some of those offered by low-cost Vanguard Group Inc. Vanguard founder John Bogle says he's impressed.

"He's proved his point that he can do it at a reasonable cost," says Bogle, who's a fan of AQR research. "If I were a betting person, I'd bet he gives competitive returns."

Asness's low fees, positive performance and powers of persuasion have reassured investors.

Alaska Endorsement

"His ability to communicate in front of trustees is phenomenal," says Jeff Scott, chief investment officer of the $36 billion Alaska Permanent Fund Corp., which invested $500 million with AQR in January, now spread among Absolute Return, Delta and Global Risk Premium. "These are people who are trying to solve our problems and not just raise money."

On an August morning, Asness walks to his sun-dappled office windowsill and picks up a Captain America action figure. The hedge-fund mogul owns a panoply of action heroes, from the Hulk to the Silver Surfer, and the comic books that spawned them.

"I like to think of it as a much, much more affordable version of a money manager collecting art," he says.

Though the wisecracks never stop, Asness is at the same time a demanding boss, two former employees say. One recalls being questioned about profit-loss updates on Thanksgiving.

And Asness admits to a temper: He's knocked his ViewSonic computer monitor to the floor on three occasions, though it never broke.

"Either they're building good computer screens or my punch isn't what it used to be," he says.

Grad School Ambiance

Asness calls the decor at AQR -- with its wood-paneled walls and spare furnishings -- "Goldman Sachs circa 1997." In tone, however, the research process hums more like a finance graduate school.

"We try and run it like an applied academic seminar," Asness says. "If you can get savage capitalists to rationally act like a team, then you have a beautiful thing."

AQR's trading is mostly automated, so there is little of the shouting and tumult that characterize some hedge funds. Partners, traders and analysts sit on a trading floor in a dozen rows, with some senior researchers taking the windowed offices. Academics are invited to give talks on subjects ranging from behavioral finance to accounting rules.

A Plethora of Funds

AQR manages some 65 funds of various stripes, and often tailors core strategies to meet client needs -- using more or less leverage, for example. The firm has adapted its models to trade in everything from the Polish zloty to Japanese bonds, to oil, gold and wheat. Asness says the myriad strategies and markets provide the extra safety that comes with spreading one's bets.

Example: AQR uses its models to run traditional long-only funds, seeking to beat a benchmark by a few percentage points while limiting risk.

"We really believe in diversification of all kinds," Asness says, adding that it especially helped during the meat grinder of 2008. "It did make it a lot easier to stay the course."

Even as he works to outsmart volatile markets, Asness continues offering opinions on everything from Broadway musicals to overhauling U.S. health care. Asness performs across all media, writing opinion pieces for newspapers and magazines, talking on television shows and at conferences and contributing to websites.

"It's almost like he can't help himself," says Theodore Aronson of Philadelphia quant firm Aronson + Johnson + Ortiz. "He's afraid of no one and is not capable of telling a lie. It's not the usual pablum."

E-Mail Blasts

Asness sounds off most frequently in e-mail blasts to a personal network of friends, family and investors. One sarcastic example, from March, concerned a U.S. Senate move to create a federal office to predict financial crises.

"This is definitely going to work," he wrote. "No more bubbles. These geniuses will get it right. Promise. And all for a government salary."

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