Down market slamming AQR but firm keeps faith in future

Value manager AQR Capital Management is experiencing its worst drawdown since the global financial crisis as markets continue to pummel value managers.

AQR's assets under management fell 23.1% to $143 billion in the quarter ended March 31 and were down 36.2% from $224 billion as of Dec. 31, 2017, the previous peak provided to Pensions & Investments, from a combination of performance losses and client withdrawals.

AQR Capital Management LLC, Greenwich, Conn., said in emailed comments that the firm's value focus was a significant contributing factor in the decline.

"In many of our strategies we pursue a multifactor investment approach, which means we select investments based on multiple factors, one of which is value. Notably, multifactor stock selection has seen a challenging environment, with the value factor as the primarily culprit for underperformance," the email said.

AQR added: "Especially in tough periods, we consider and test whether returns are indicative of the strategies being impaired. If they pass all tests we can come up with, as they do today, we then rely on very long-term evidence and on the economic motivations behind them. It is important to note that we have seen difficult periods of performance in our history before and while recent results do not impact our overall investment philosophy or change our fundamental process, we continually innovate, enhance and improve our process and strategies."

AQR's overall decline in the first quarter was "due to market losses, not outflows. The majority of our assets — nearly 60% — are in traditional long-only strategies. When global markets across geographies and asset classes suffer such unprecedented sharp declines, it is to be expected that long-only strategies decline," according to the email.

The MSCI ACWI Value Net Total Return USD index was down 27.1% in the quarter and down 18% year-to-date through June 25, while the MSCI ACWI index was down 21.4% over the three-month period and down 6.5% year-to-date.

Sources agreed that much of AQR's recent performance and AUM downturn were directly tied to the firm's commitment to value investing across its broad array of more than 60 investment strategies.

"For systematic value-oriented managers, this is a very difficult environment. It's not what quant value managers built their models on," said Jason A. Voss, senior consultant at Focus Consulting Group Inc., Long Grove, Ill., an adviser to money managers.

"This is the most unusual interest-rate environment since the Babylonians and for quantitative value managers, the data just doesn't indicate what you're supposed to do. Value investing is about reversion to the mean, but the mean itself has been changing and few managers have adapted," Mr. Voss said.

An investment consultant who spoke on condition of anonymity said: "It's like they've lost their way. If AQR can't make sense of when value will rise, who else will?" The consultant added that given the strong value tilt in AQR's style-premium strategies that's pulling down performance, "(alternative-risk premium) funds are the biggest disappointment of the current crisis."

Clifford S. Asness, AQR's managing partner and founder, has been vociferous in defense of value investing over the past few months.

In a May 8 blog post, titled "Is (Systematic) Value Investing Dead?" Mr. Asness set out to prove that value investing is alive, although arguably not particularly well right now, based on research conducted by AQR colleagues.

"Having gone through this very bad two-plus years for multifactor stock selection portfolios with value the primary culprit, it is essential that we challenge ourselves to review various proposed explanations for value's losses … in particular whether the cheapness of value investing is caused by some narrow super-company subset of the market or deep inadequacies in the popular price-to-book measure," he wrote.

"After extensive, exhaustive and exhausting examination, we find absolutely zero support for this worry. We think the medium-term odds are now, rather dramatically, on the side of value, with no 'this time is different' explanation we can find … holding a drop of water and no other period in the 50-plus year history matching today. It has certainly been excruciating getting here, but here we are, and it (has) never looked cheaper looking forward," he wrote.

During a webcast interview with Frank J. Fabozzi, editor-in-chief of The Journal of Portfolio Management in early May, Mr. Asness went further, declaring that AQR expects a large recovery for value stocks going forward and noted that "we've thrown everything we can at it and will be sticking with it like grim death, and like we have several other times in the past, we will win."

Despite AQR's admission that much of its asset decline was from investment performance, P&I's reporting over the past 18 months shows that part of AQR's loss was the result of 10 terminations and reductions in mandate sizes from a range of investment strategies by institutional investors.

Performance has been a driver for some terminations, consultants said, given that AQR's DELTA Fund, one of the firm's strategies popular with institutional investors, struggled in the first quarter and over longer periods.

Performance of the quantitative multistrategy hedge fund was down 20.6% for the quarter, 27% for the year, 8% for the five years and 1.5% for the 10 years ended March 31, according to performance data from Morningstar Inc. Multiyear returns are annualized.

The annualized return of the broad DELTA strategy, which encompasses multiple funds, was up 1.2% since inception in October 2008, according to AQR's first-quarter report about the approach, obtained by P&I.

In the report, AQR said: "To say this past quarter was a disappointing one for the strategy would be an understatement. Not only was the 21.5% loss (for the strategy overall) the worst performance the strategy sustained in any quarter over more than a decade, but it was more than three times the size of the next largest quarterly loss. We are very dissatisfied with this outcome ... additionally, the strategy's macro-oriented losses were largely a product of terribly unfortunate idiosyncratic relative value and directional positioning, not due to market beta."

However, some investors were pulling money from AQR strategies even before the impact of the COVID-19 pandemic became apparent on global markets.

The $1.1 billion Kansas City (Mo.) Employees' Retirement System terminated AQR in February for management of $19 million in AQR Delta XN Offshore Fund for performance reasons, confirmed Barbara Davis, executive director, in an email.

The $9.3 billion Sacramento County (Calif.) Employees' Retirement Association also terminated AQR in April, pulling $40 million out of the AQR Delta Fund II. The system previously redeemed $12.5 million from the AQR hedge fund in September 2019 for performance reasons.

As of Dec. 31, the most recent date available, DELTA Fund II returned a net -2.4% in the quarter compared with 1.7% for the benchmark, the HFRI FoF Conservative index. For the year, it had net performance of -9.2% vs. 6.3% return for the benchmark, a performance report showed.

Steve Davis, Sacramento County fund CIO, did not reply to a request for more information.

An AQR spokesman declined to comment on the Kansas City and Sacramento County terminations.

In May, $4.5 billion San Mateo County Employees' Retirement System, Redwood City, Calif., redeemed $104 million from AQR DELTA XN Fund, documents from the fund showed. A reason for the termination was not provided.

As of March 31, returns of another popular fund, the AQR Style Premia Alternative I Fund, were down 8.1% in the quarter, 20.4% for the year and 1.7% over five years, Morningstar data showed.

Returns of AQR's Managed Futures Strategy I as of March 31 were up 3.3% in the quarter, up 3% for 12 months and down 3.96% over five years.

One consultant, who spoke on condition of anonymity because they can't discuss individual money managers on the record, generally spoke highly of AQR's commitment to a strong, research-oriented culture, robust portfolio management and intense client engagement.

"There's definitely an existential crisis for a lot of risk-premia managers like AQR and those that followed it," the consultant said. "Value as a construct under these circumstances in the first quarter certainly exacerbated the firm's existing problems with ARP."

In response to declining AUM, AQR reduced its employee head count of 900 by between 5% to 10% at the beginning of 2020.

As of Dec. 31, 2019, AQR's AUM totaled $186 billion, down 5.1% from $196 billion the prior year.

Despite the steep decline in assets in the quarter ended March 31, "in the current environment, our head count is effectively meeting the needs of our business and we currently have no plans for head count reductions. Additionally, we continue to move forward with our planned hiring for open positions by taking advantage of technology to conduct interviews and onboard new hires virtually," AQR said in its statement to P&I.