Independent Thinking^®

Q&A with AQR Multi-Strategy Alternative Fund

Editor’s note: Evercore Wealth Management supplements its core investment capabilities with carefully selected external funds across the range of the firm’s asset classes.

Here we interview Ronen Israel, one of the Portfolio Managers of the AQR Multi-Strategy Alternative Fund. The fund, which seeks a long-term positive absolute return, consists of exposure to nine major strategies: Long/Short Equity, Equity Market Neutral, Dedicated Short Bias, Emerging Markets, Convertible Arbitrage, Event Driven, Global Macro, Managed Futures and Fixed-Income Relative Value.
 
Q: AQR has been a pioneer and leader in the liquid alternative investment field. What do you think about liquid alternatives? What do you think about the value of mutual fund structures versus more traditional hedge fund Limited Partnerships?
 
A: We define liquid alternatives as liquid, relative-value strategies that can provide meaningful diversification benefits to traditional portfolios. Investors who are already invested in traditional markets generally consider adding liquid alternatives to their portfolio as a way to increase returns and reduce risk through diversification.
 
Typically, a mutual fund structure has the advantage of liquidity and transparency. While not all traditional hedge fund strategies are conducive to a mutual fund structure, we believe properly implemented liquid alternatives are suitable with relatively minor modifications to the design and implementation of the strategies.
 
Q: How would you describe the investment approach of the AQR Multi-Strategy Alternative Fund?
 
A: The fund seeks to provide balanced exposure to a broad set of classic, liquid, relative-value strategies and is designed to have low correlation to traditional markets. Each underlying strategy is built from the bottom up using a systematic and transparent process, investing across global stock, bond, commodity and currency markets. The multi-strategy structure helps to enable investors to benefit from diversification, rebalancing, and more efficient portfolio construction.
 
The strategy is designed to be a core holding for investors seeking exposure to alternatives, often in conjunction with satellite allocations to other complementary strategies.
 
Q: Can you tell us a bit more about “hedge fund beta”? What does it mean for investors in hedge fund offerings?
 
A: We believe hedge fund strategies can be decomposed into three return sources: traditional beta, which is exposure to traditional markets; hedge fund beta, which is exposure to well-known, dynamic sources of alternative returns; and true alpha, which describes the portion of returns that are derived from idiosyncratic investment processes and cannot be explained by the first two.
 
This matters for two reasons: one, it represents a more transparent and systematic way to capture many of the core drivers of hedge fund strategies; two, when implemented properly, hedge fund beta can offer attractive, long-term, risk-adjusted returns, which – just like alpha – have historically been uncorrelated to traditional markets.
 
Q: How do you expect the Multi-Strategy Fund to perform in different market environments (e.g., bull markets, bear markets and through the cycle)?
 
A: The fund is designed to have low correlation to traditional markets, so the performance should not be driven by where we are in the cycle or whether equity markets are up or down, but rather by how the nondirectional underlying investment themes perform. In other words, the fund has the ability to make or lose money in both up and down markets, and sometimes the factors that may drive the performance of the equity markets could also have a secondary influence on the performance of the nondirectional underlying investment themes of the fund. However, over the intermediate and longer term, we expect the fund’s performance to be largely independent of, and resilient to, bull and bear markets.
 
Q: Hedge funds and liquid alternatives generally have had very weak relative performance over the short and medium term, even on a risk-adjusted basis. What do you believe has driven poor performance in the asset class?
 
A: Hedge funds include many different strategies, so it’s hard to narrowly attribute the performance of the industry. However, one consideration is the level of correlation to traditional markets. Historically, most hedge funds and liquid alternatives have demonstrated very high levels of correlation to equity markets, leading to better performance when equity markets are doing well (and thus, worse performance when equity markets are doing poorly).
 
Q: Any other topics you think are noteworthy?
 
A: Many clients ask about how to best benchmark the fund. Given that the strategy is designed to deliver low correlation to traditional markets (such as stocks and bonds), cash is the most suitable benchmark. Some will compare the fund to hedge fund indices, but the indices are highly correlated to equity markets, and contain many biases and suboptimal strategy allocations, thereby making hedge fund indices a less than perfect benchmark.
 
This interview represents the views of Ronen Israel and not necessarily the views of Evercore Wealth Management.
 
For further information on the AQR Multi-Strategy Alternative Fund and other holdings on the Evercore Wealth Management Efficient Architecture investment platform, please contact Brian Pollak at [email protected].