Clifford Asness, chief of AQR Capital Management, is the face of a trend that is sweeping Wall Street. A quantitative trading pioneer with a background that includes a doctorate, Goldman Sachs and hedge funds, Asness has experienced highs and lows over his 25-year career. He is now running one of the fastest-growing asset managers on Earth by popularizing what has become the latest investing craze.
At 50, Asenss is today also a billionaire. His net worth is estimated at $3 billion. Two of his fellow AQR co-founders, David Kabiller and John Liew, are each worth $1 billion, making AQR one of the few Wall Street firms to mint three billionaires. All three men appear on Forbes’ list of billionaires for the first time. The way Asness and his partners got there says a lot about what is happening on Wall Street these days.
Started as a quantitative hedge fund firm, AQR stands for Applied Quantitative Research. It emerged from losses and hair-raising experiences stemming from the 2007 quant meltdown and the 2008 financial crisis with assets at $33 billion at the end of 2010. In the years since, Asness has moved away from hedge funds and aggressively into lower-fee, liquid and transparent products, including mutual funds, that use computer models, often to replicate hedge fund returns.
AQR’s products feature rules-based systems that trade assets and claim to offer fair fees for uncorrelated returns. Its strategies often invest in stocks and other securities based on attributes, factors like value and momentum, believed to produce higher returns over time. The firm essentially attempts to combine the virtues of passive and active investing. The trend that has fueled AQR the most is the idea that investors should not pay expensive fees for what are essentially market returns.
Call it smart beta or factor-based investing, Asness’ timing could not have been better. In an era when hedge funds and other active managers have proven unable to keep up with low-cost passive index funds and justify their high fees, Asness has successfully sold institutional and retail investors on a hedge fund-lite strategy. Investors have rushed into AQR and the firm’s assets under management now stand at $185 billion.
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“AQR has brought alternative strategies to the mainstream not by trying to outperform everyone, but by trying to provide the inherent average return in the alternative space,” says Tayfun Icten, an analyst who covers AQR’s funds at Morningstar. “They were early in this commoditization process that coincided with hedge funds struggling and put together the right packet for investors that were looking for something like this and AQR just hit it.”
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AQR has many funds and strategies. With $26.2 billion, one of AQR’s biggest strategies, its Global Risk Premium, returned 10.8% in 2016 and 5.6% annualized since its 2007 inception. The strategy charges a 0.4% management fee. The $18.2 billion AQR Style Premia strategy returned -1.5% in 2016 and has returned 9.4% annualized since its September 2012 inception. It charges a 1.5% management fee. AQR’s longest-running long-only equity strategy, International Equity, has returned 4.3% annualized since its inception, 1.7% over its benchmark. AQR’s biggest mutual fund, AQR Managed Futures Strategy, has struggled in the last year, returnin g -8.12% and returned 2.98% annualized over the last five years. Many trend-following funds like it have also performed poorly in the last 12 months.
So much money has flowed into AQR and other asset managers pursuing so-called smart-beta strategies that some market players are worried these strategies could backfire.
How much of AQR’s evolution has been by design is debated on Wall Street. Generally a media-friendly guy, Asness declined to comment for this article. Some quant hedge fund types think Asness pivoted away from hedge funds because of the problems the firm had in 2008 and 2009. People at AQR argue that from the start Asness, Kabiller and Liew envisioned AQR as a global investment management firm that would be much more than a hedge fund, which was just the easiest place for the AQR partners to start—the firm was offering a long-only product 18 months into its existence. What is undeniable is that Asness has built a thriving business, chall enging a hedge fund model that looks increasingly broken and barreling ahead into new areas of expansion.
Asness’ story is well known and has been written about extensively. Born in Queens, Asness grew up on New York’s Long Island. After graduating with degrees in economics and engineering from the University of Pennsylvania, Asness studied finance at the University of Chicago under Nobel Prize winner Eugene Fama, whose research helped kick off the idea of passive index investing popularized by Vanguard and Jack Bogle. Fama’s research is also at the core of factor-based investing and Fama is a director of one of AQR’s biggest competitors, Dimensional Fund Advisors.
Asness landed on Wall Street in the mid 1990s, working on innovative computer models and quantitative trading at Goldman Sachs Asset Management. Liew and Robert Krail, fellow University of Chicago classmates, joined him. Together they created Goldman’s most successful hedge fund, the Global Alpha quantitative strategy, and met a salesman named David Kabiller.
But by 1998 the hedge fund wave was sweeping Wall Street and Asness, Liew, Krail and Kabiller, left Goldman to ride it. Setting AQR up in the hedge fund capital of Greenwich, Ct., Asness, Liew and Krail worked on computer-driven investment algorithms while Kabiller operated as the head of business development and the contact for clients like pension funds and endowments. AQR’s models, however, ran straight into the Internet stock bubble and performed poorly, at one point threatening the viability of the firm.
After the Internet bubble burst, AQR had a terrific run, producing good returns for a few years and attracting big asset inflows. Asness and his p artners even sold a minority stake of AQR to Affiliated Managers Group and were working on an initial public offering. The good times ended in August 2007 when AQR and several prominent quantitative trading hedge funds suffered big losses fast that fed off each other. The IPO was called off and Asness had to write a letter to his investors denying rumors his firm was in serious trouble. AQR survived, but AQR got hit with more losses in the financial crisis. One of the original AQR partners, Krail, retired for health reasons.
AQR bounced back quickly from the financial crisis with an asset mix that reflected less of a reliance on its initial hedge fund business. Asness, Liew and Kabiller charged into mutual funds starting in 2009, raising retail assets quickly. Asness led the way on Wall Street in offering lower-fee products that relied on factor-based investing to both institutional and retail investors—AQR’s mutual funds now manage $35 billion.
Asnes s also seemed to enjoy sticking it to the hedge fund industry that spawned him. “There is not an investment profit so good that there is not a fee that can make it bad to the client,” Asness once told Forbes, claiming that AQR charges the appropriate fees for its products. Asness has for years pointed out that many hedge funds charge too much for what they are providing their investors, which often just amounts to basic market exposure. Asness has said he is not against charging high fees if a hedge fund manager has found a sustainable way to produce excess returns with less risk. Asness’ remaining hedge fund products are for the most part cheaper than the average hedge fund. Its hedge funds sometimes charge performance fees of 10% of profits. But some AQR hedge funds still charge the industry standard 2% of assets and 20% of profits.
As his business boomed, Asness has remained a very public figure in the investing world and often beyond, attending conferences, conducting television interviews, writing online posts, releasing academic papers on investing—and tweeting. Asness recently rejoined Twitter after abandoning a previous account. He can be confrontational. “If a Keynesian and a Luddite married, and had a very very slow witted child, he’d be you,” Asness tweeted at a person who recently supported Bill Gates’ idea that robots should be taxed.
In 2009, Asness scolded President Obama, whom he had initially supported, in a public letter titled “Unafraid in Greenwich.” He played a pivotal role in making gay marriage legal in New York. A supporter of Marco Rubio during the Republican presidential primaries and a fierce critic of Donald Trump, Asness wrote amid g rief last year before the election that his father’s passing had caused him to rethink his view of Trump’s supporters. “The man I loved, and more important to this issue, the man I respected most in the world thought Trump was the change we need,” Asness wrote.
The change Asness has helped usher on Wall Street—seemingly combining the virtues of passive and active investing—has become the hottest new investment trend. Many big players are trying to get in on the game. Goldman Sachs last year launched its first smart-beta ETF. Even the most powerful quantitative hedge funds, D.E. Shaw and Two Sigma Investments, are launching for institutional investors products that look a lot like AQR’s offerings. A wave of computer and systems-based investing has swept financial markets and the lines between hedge funds and traditional asset management are blurring. AQR sees itself in competition with firms ranging from BlackRock, the world&rsq uo;s biggest asset manager, to Bridgewater Associates, the world’s biggest hedge fund. AQR sells products featuring risk-parity strategies, among Bridgewater’s biggest businesses.
Asness doesn’t like the term smart-beta. It makes his investing techniques seem like a fad and Asness views himself as a rigorous quant with an approach that is tried and true. Rob Arnott, also a pioneer in this field and founder of Research Affiliates, has been warning of overly valued smart-beta ETFs and a “smart-beta crash.” But Asness, who does not sell ETFs and has frequently clashed with Arnott, seems much less concerned as long as smart-beta type strategies are executed smartly using diversification over the long-term. Asness is particularly dismissive of the idea of trying to engage in factor timing based on valuations.
With 764 employees working from Hong Kong to London and New York, Asness has built an engine that can drive various buckets of risk , combining them in many different ways, and repackaging them depending on what investors desire using the same infrastructure and investment process. The firm is clearly pushing forward fast—Kabiller has 142 people working in AQR’s business development group. AQR’s next planned expansion is with fixed income products. The firm already has an investment grade and a high yield vehicle for institutional investors. AQR is working to launch fixed income mutual funds next.