Once hailed as the wizards of finance, quantitative hedge funds have not been very dazzling lately. One of the most famous and a pioneer in this math-intensive field, AQR Capital Management, is cutting resources as it faces investment exits.
The company, led by Cliff Asness, ends a key bond transaction, separates from five partners and cuts other activities, the Financial Time reported. The closed bond strategy focuses on long-term bonds; the unit began in 2014, wrote investment site FundFire.
This is just the last downsizing for the company in the past four years. AQR’s assets under management peaked at $ 226 billion in 2018 and now stand at $ 137 billion, a decline of nearly 40%. While the precise returns of its subsidiary hedge funds are unclear, the company admitted they had been disappointing. Earlier this year, Asness told the FT that 2018-2020 was “actually the most difficult time I’ve ever seen,” but claimed things had started to change. “I wouldn’t be surprised if this cover was the biggest and the longest.”
Quants, which build computerized mathematical models that aim to evoke superior investment strategies, were once all the rage. Asness was at the forefront of the creation of the category. After obtaining a doctorate. from the University of Chicago (where his thesis supervisor was Nobel Laureate Eugene Fama), he created a quantitative department at Goldman Sachs and then launched AQR with partners in 1998.
Hedge funds in general have been following the roaring bull market for some time, and quantitative funds are no exception. Quantitative hedges are up 13.5% this year, compared to the S&P 500’s 24.7% rise, according to Hedge fund research– and over three years, the gap is even greater, 9.3% per year for quants, and 21.8% for the broad market index.
AQR is not alone in its setbacks. A recent analysis of quantitative equity funds by the Association of Chartered Alternative Investment Analysts (CAIA) said they were “in a bit of a midlife crisis.”
Asness’s company has a strong inclination towards equities, although it is also active in fixed income and alternative investments. The CAIA report criticized the quants for not keeping up with current trends and for their reliance on historical data, which it said may no longer be relevant today. The quants, the CAIA said, do not take into account new investment forces such as the effect of climate change, demographic shifts, wealth inequalities and “the integration of technology into our everyday being.”
At Morningstar: Asness has no simple answer to quantitative strategy losses
Why quantitative strategies struggle
How did Ken Griffin become so important?
Keywords: AQR, CAIA, Cliff Asness, Eugene Fama, Goldman Sachs, Hedge Fund Research, hedge funds, quants, S&P 500