Aqr’s Momentum Funds

Kahled Darouich        

27187378

FINA 411 sect. F

Case Summary #2

AQR’s Momentum Funds

This case focuses specifically on the momentum strategy. First academic paper written by Jegadeesh and titman and later on extended by cliff Asness in 1994 showing the potential profits one can make using the momentum strategy. AQR defines the momentum as the phenomenon that stocks, which have performed well in the past, will also perform well in the future, and the stocks that have performed poorly in the past will continue to perform poorly in the future regardless of what the market has in store for it.

AQR invested a large percentage of its assets in hedge fund strategies and later realized that mutual funds market would be profitable investment if added to their product lines knowing demanding will increase in the future. Nevertheless, up until this point, momentum was a strategy employed entirely by hedge funds, and therefore not an available investment strategy to normal individual investors. Some reckoned the idea that momentum investors had large return for bearing undiversifiable risk, others thought it was the overreaction of news and other under reaction of news.

Mutual funds differ from hedge funds in many ways. Firstly, anyone can invest in mutual funds, whereas only institutions and net-worth investor could invest in hedge funds. Another important difference is that hedge funds investors could only cash out at the end of a quarter, but open-end mutual fund investors could cash out at any time making it harder to implement the strategy.

AQR planned on purchasing funds with the help of financial advisors such as dimensional fund advisors for their three new funds that would reveal investors portfolio to the momentum effect like we saw in case 1. The three long-only momentum indexes are: large-cap US, small-cap and large-cap international which was of great help to investors because it informed on how the new strategy worked and what they would expect performance wise thanks to back testing of plus 80 years of data. They also had the choice between 3 different funds therefore choosing their tolerance accordingly.