“Wherefore art thou, diversification?” quipped David Kabiller, borrowing Shakespeare's famous question by way of referring to what he said is one of the two essential attributes of hedge funds.
The other vital hedge fund characteristic is consistent performance over time, said Mr. Kabiller, founding partner and head of business strategy at AQR Capital Management LLC, Greenwich, Conn.
It's precisely at this intersection of diversification (or non-correlation to market beta) and return that AQR has added a new performance fee option for its $800 million Dynamic Economically Intuitive Liquid Transparency Alternative hedge fund, better known by its acronym, DELTA.
DELTA's new linear fee debuted at the beginning of the year and is based not only on the fund's return, but also on how correlated that return is to the Morgan Stanley Capital International World index, Mr. Kabiller said in an interview.
If DELTA's performance essentially matches the index return, AQR won't charge a performance fee. If DELTA's return ranges between plus or minus 0.2 compared with the return of the MSCI World index, the performance fee rises to 10%; it jumps to 20% if the hedge fund's performance correlation is -1. The fund's 1% current management fee still applies. Clients may also decide to stick with the fund's fixed 10% performance fee.
“Nobody is policing diversification, but it's one of the core requirements of a hedge fund strategy. We created a fee structure for DELTA that rewards AQR when we provide both positive returns and diversification for our investors and penalizes us when we don't,” Mr. Kabiller said. — Christine Williamson