Aqr's Retail Momentum Strategy

How did AQR’s retail momentum strategy differ from the traditional approaches? Would those differences make the strategy more or less appealing to retail mutual fund investors? What are the expected returns and risks of AQR’s retail momentum strategy as compared to the traditional approaches? The advantageous correlation structure in Exhibit 5 was seen as a key selling point of momentum. Is this the right way to think about AQR’s momentum mutual funds? If not, use the data in the Spreadsheet Supplement to construct a more informative set of correlations

1. Different characteristics and appeals

Under the traditional approach, which can be called UMD, we can implement momentum strategy just by longing the stocks ranking in the first 10 percentage (winner stocks) and shorting the stocks ranking in the last 1 percentage (loser stocks). As for AQR, the momentum strategy is taken by a new created mutual fund, which seems to be regulated more. Simply to say, the traditional approach shares lots of characteristics with hedge fund while AQR is a mutual fund. Mutual fund is more regulated and it may have lower return and less risks.

The following table summarizes the main characteristics of AQR and UMD (traditional approach). AQR’s momentum strategy, based on mutual fund, only longs the past high return stocks while UMD not only long the highest return stocks but also short the lowest return stocks. It is hard to say whether long only strategy or long and short strategy is more appealing to investors. Different types of investors prefer to different strategies. Secondly, ARQ may rebalance its portfolio more often than UMD. As for its bench market index, it rebalances quarterly. However, UMD rebalance monthly. It is still hard to say which one is more appealing because frequent rebalance can add values but will increase transaction costs. A tradeoff must be made between the two. Thirdly, AQR strategy is based only