AQR makes US mutual fund comeback with new levered trade strategies

AQR Capital Management is doubling down on a strategy that seeks to juice returns with leverage for its first new US mutual funds in four years.

The Greenwich, Connecticut-based quant pioneer debuted three funds Wednesday after launching one last week, all of which employ an asset-allocation approach known as “portable alpha.” 

Such portfolios typically use derivatives to track the performance of asset benchmarks, freeing up capital so an active strategy can be layered on top. The pitch is that it gives investors more bang for their buck.

Portable alpha is infamous for blowing up during the 2008 financial crisis when a synchronized selloff swept across assets. But it’s enjoying a revival on Wall Street as investors look to maintain exposure to the relentless stock rally while adding diversifying bets in case things go south.

The new AQR products — dubbed Fusion Funds — will target taxable investors and incorporate tax considerations in their trading, the firm says. Including its institutional offerings, it now runs about $500 million in portable alpha. 

“Many taxable investors are seeking ways to add alternative investment strategies to their portfolios while maintaining their target asset allocation,” Brad Jones, head of broker-dealer distribution for US wealth at AQR, said by email. “The Fusion Funds address that challenge by offering a better way for investors to add diversifying strategies in a capital-efficient and tax-aware manner.”

The new funds all offer US equity exposures combined with a hedge-fund strategy. One will deploy long-short stock-picking, while another will use trend-following — a classic quant approach that chases momentum across asset classes. The other two will combine an array of AQR trades.

The goal of portable alpha is to use the leverage to boost returns, but that only works if the hedge-fund bets layered onto the portfolio make money — and that isn’t guaranteed. For example, an index of trend followers has declined 11.4% this year as volatile US policy whipsaws markets.

AQR’s version of the strategy has fared better with a small positive return. The firm’s flagship multistrategy Apex fund gained 10.6% this year through May, Bloomberg News reported previously. 

The recent resurgence of portable alpha has seen it repackaged in retail-friendly forms, including in exchange-traded funds. While many asset managers have shifted away from mutual funds and toward the more liquid ETF structure, AQR remains a rare holdout.  

“The daily holdings transparency of ETFs prohibits top active managers from running their best strategies,” Jones said. “We have opted to launch the Fusion Funds in a mutual fund wrapper so we are able to deliver our best implementation.”