AQR Capital Management has launched a new alternatives mutual fund that takes factor investing to another level.
Factor investing, or “smart beta,” as marketing folks call it, focuses on characteristics such as value, momentum and carry to increase returns. Those investment themes are not new but they've never been more popular than they are today.
Dimensional Fund Advisers, the granddaddy of factor investing through mutual funds, had almost $17 billion of net inflows through the first three quarters of the year, its most net deposits ever. In addition, a growing number of similar strategies are also popping up in exchange-traded-fund form.
While the majority of factor-based funds are long-only and stick to stocks, the newly launched AQR Style Premia Alternative Fund (QSPIX) will use a long/short strategy to attempt to isolate specific factors in stocks, bonds, commodities and currencies.
“It's almost like a smarter smart beta,” said Nadia Papagiannis, director of alternative fund research at Morningstar Inc.
We're taking out the market risk but keeping the factor risk.David Kabiller, founding partner of AQR
In the equity value bucket of the fund, for example, it will go long traditional value stocks and short traditional growth stocks.
“We're taking out the market risk but keeping the factor risk,” said David Kabiller, founding partner of AQR. “You don't need the factor and 99% of the exposure of the stock market because you can buy that in a cheap index fund.”
By shorting stocks that don't fit in the value category, the strategy lessens the loss if the stock market starts to fall, he said.
For example, if the S&P 500 fell 20% and value stocks were down 15%, but growth stocks were down 20%, the long/short value strategy would be up 5% because of its shorts against growth stocks. If the opposite were true, the strategy would only be down 5%, rather than the 15% loss seen in a normal value strategy.
The AQR Style Premia Alternative Fund uses that same basic methodology to invest in momentum, carry and low-volatility factors across its various asset classes.
Taking the market exposure out of stocks, bonds, commodities and currencies and just focusing on the factors of return means the fund is going to move differently from stocks and bonds, in theory, at least.
Ms. Papagiannis pointed out that since the fund is essentially market-neutral, it shouldn't be expected to keep up with a bull market. But that's not necessarily a bad thing, she added.
“As long as it has lower correlation than what it's replacing, it can positively affect the risk-adjusted returns of an overall portfolio,” she said.