Alternative Investing
Introducing the New AQR S.M.O.O.T.H. Fund
February 25, 2019
Topics - Alternative Investing Portfolio Risk and Performance
I do not usually introduce new investment products on this platform, but this is important enough to make an exception (note, for this post it is even more important than usual to read all the footnotes).
The new AQR S.M.O.O.T.H. Fund 1 1 Close “Systematic Multi-Operational Optimized Trading Hedged” Fund. Some mistakenly think the “S” stands for “Satirical.” is simply a superior offering to anything we have done before. It provides the same long-term attractive expected returns as our other offerings, yet at a fraction of the volatility, with very few to no embarrassing losses. For instance, while 2018 was a very painful year for many of our strategies, for many other liquid alternative products in general, and, to some degree, a poor one for virtually all traditional liquid asset classes and most geographies (e.g., long-only stocks and bonds), the S.M.O.O.T.H. Fund would’ve sailed through largely unscathed.
As with many of our other alternative strategies, it offers attempted low to zero correlation to traditional markets – but in this case we are also offering what we are dubbing “doubly uncorrelated”™© returns. The Fund’s actual underlying liquid investments, as we do in most of our alternatives, strive to be uncorrelated to traditional markets (recall we do not think this is true for most hedge funds). But now, due to our new proprietary S.M.O.O.T.H. process, 2 2 Close This very much satirical (i.e. non-existent) proprietary process involves implementing our normal hedged liquid alternative process, but only marking to market occasionally, and then reporting some combination of the weighted average of the prior few years’ prices, with a healthy weight also given to our own unaudited estimates of what the Fund is likely worth (based on how we think it should’ve performed). even if we fail to deliver this lack of correlation, the S.M.O.O.T.H. Fund will still report 3 3 Close The astute reader will notice the use of the word “report.” returns mostly unrelated to normal markets. It’s next level belt and suspenders type diversification.
Of course, the same long-term returns, but delivered with way more stability, comes at a price (to you). These funds will not be offered at competitive fees, as is our norm, but rather will feature the traditional 2 and 20 fee model. In addition, we may charge some fees based on capital you have not invested with us yet but expect to later. We also might receive some additional fees from the underlying assets themselves (we’re still working on how to do that as quants but are optimistic that we can get there). We think this is only fair given how smooth the S.M.O.O.T.H. Fund will be. This Fund will be amazingly easy to stick with, and the long-term should truly be great. That’s worth a premium and we don’t feel even slightly guilty about it. 4 4 Close Remember, you get the lack of liquidity and transparency you pay for!
In addition, many of AQR’s normal liquid alternatives make some use of leverage to hit their return targets (gearing up what we think is an attractive, but too conservative unlevered return). The funds underlying our new S.M.O.O.T.H. offering will do exactly the same thing. But, given the structure and designed opacity, investors will hardly notice! So, besides its masking of difficult to stomach volatility, the S.M.O.O.T.H. Fund also greatly reduces what we’re calling “perceived leverage.” In turn, this allows us to use even more actual leverage, so we do. It should be a very calming change.
Finally, because I know you care about us, we’re working on how to get carried interest treatment on these high performance fees so we can pay the substantially lower tax rate that the world mistakenly still thinks we already pay (recall that managers like us are often believed to be getting this big tax break, but we pretty much don't). We know you understand that this tax cut will allow us to invest more in our business, including new and better smoothing techniques and high-end conferences where we’ll bring in relevant speakers like the Dalai Lama and Sting, and permit us to offer the high-end perquisites necessary to attract the best pedigreed portfolio managers (we will not allow this portfolio not to be marked to market by just anyone). It’s a win-win (except for the IRS).
OK, if you really want some insights into the world of smoothed returns, and some balanced analysis not just sarcasm and wishful jealousy, I suggest you read this real paper after reading this (hopefully obviously!) satirical one. 🙂
The AQR S.M.O.O.T.H. Fund is not an investment vehicle that AQR manages or that investors can invest in and is referred to for illustrative (humorous) purposes only.
This document is not intended to, and does not relate specifically to any investment strategy or product that AQR offers. It is being provided merely to provide a framework to assist in the implementation of an investor’s own analysis and an investor’s own view on the topic discussed herein.
This document has been provided to you solely for information purposes and does not constitute an offer or solicitation of an offer or any advice or recommendation to purchase any securities or other financial instruments and may not be construed as such. The factual information set forth herein has been obtained or derived from sources believed by the author and AQR Capital Management, LLC (“AQR”) to be reliable but it is not necessarily all-inclusive and is not guaranteed as to its accuracy and is not to be regarded as a representation or warranty, express or implied, as to the information’s accuracy or completeness, nor should the attached information serve as the basis of any investment decision. This document is not to be reproduced or redistributed to any other person. The information set forth herein has been provided to you as secondary information and should not be the primary source for any investment or allocation decision. Past performance is not a guarantee of future performance. Diversification does not eliminate the risk of experiencing investment losses.
This material is not research and should not be treated as research. This paper does not represent valuation judgments with respect to any financial instrument, issuer, security or sector that may be described or referenced herein and does not represent a formal or official view of AQR. The views expressed reflect the current views as of the date hereof and neither the author nor AQR undertakes to advise you of any changes in the views expressed herein.
The information contained herein is only as current as of the date indicated, and may be superseded by subsequent market events or for other reasons. Charts and graphs provided herein are for illustrative purposes only. The information in this presentation has been developed internally and/or obtained from sources believed to be reliable; however, neither AQR nor the author guarantees the accuracy, adequacy or completeness of such information. Nothing contained herein constitutes investment, legal, tax or other advice nor is it to be relied on in making an investment or other decision. There can be no assurance that an investment strategy will be successful. Historic market trends are not reliable indicators of actual future market behavior or future performance of any particular investment which may differ materially, and should not be relied upon as such. Diversification does not eliminate the risk of experiencing investment losses.
The information in this paper may contain projections or other forward-looking statements regarding future events, targets, forecasts or expectations regarding the strategies described herein, and is only current as of the date indicated. There is no assurance that such events or targets will be achieved, and may be significantly different from that shown here. The information in this document, including statements concerning financial market trends, is based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons.