Aqr’s Delta Strategy Harvard Case Solution & Analysis

INTRODUCTION

AQR capital management is a global provider of investment management services. AQR was founded in 1998 and its headquarters is in Greenwich Connecticut. AQR offers a wide range of investment products such as traditional investments to absolute return on hedge funds. AQR takes a systematic, research based approach, quantitative tools to process fundamental information and manage risks. The firm’s clients include institutional investors such as pension funds, insurance funds, foundation wealth funds and financial advisors.

As of December 31, 2012 AQR had approximately 70.6 billion of assets under management.The objectives of DELTA include delivering well diversified strategy to achieve hedge fund like risk premium, low correlation to traditional asset class return, maintain attractive leverages and liquidity characteristics, and achieve attractive risk adjusted returns as of the market cycle. One of the advantages of AQR Delta funds is that it attracts investors due to low fees charges.

Many investors found hedge funds more appealing, however, due to other hedge funds alternatives, investors were attracted to the possibility of obtaining a high returns and low covariance deliberately found hedge fund unappealing. Some of the alternatives of hedge funds are Funds of Hedge Funds (FOFs), Multi-strategy Funds and Hedge fund replication.

CASE ANALYSIS

The basic purpose of AQR’s DELTA strategy is to seek and efficiently capture a diversified set of hedge fund. The firm uses a bottom-up approach, clearly defined investment strategy to build a portfolio. According to AQR, the delta performance portfolio gained advantage in 2008, but traditional and hedge funds suffered greatly. The reason of downfall is that Delta uses risk allocation whichallowed diversification and reduced alliances on strategies that suffered during market sell. Apart from that, Delta employed classical strategies that are not seeking to be uncorrelated with traditional market and also difficult to finance strategy.

As thecase states, the management of the hedge funds diagnosed a problem that hedge fund strategy will decline in the near future. In 2008, DELTA had begun with tremendous success, but subsequently the management of the company felt that Delta’s hedge fund is losing its potential.  In order to gain success, the company must develop a strategy to overcome the issues.The number of challenges faced by DELTA such as high competition in the hedge fund, hedge fund replication is emerging the market and have a better liquidity option for the investors and which fee structure should be implemented. Moreover,AQR’s approach isto capture hedge fund in risk premium which requires skills and expertise. All of these issues need to be addressed to overcome the challenges faced by the Delta’s hedge funds.

Aqr’s Delta Strategy Case Solution

COMPARISON OF DIFFERENT STRATEGIES

Following are the comparison of different strategies based on Alpha and beta Exposure, liquidity, minimum investment, diversification. Managerial talent decision, access to niche or closed strategies and incentive provision managers.

ALPHA AND BETA EXPOSURE:

Alpha means the excess return from active management. As new factors emerge, alpha explains a small portion of portfolio return.On the other hand, Alpha transforms into beta as a new risk factor and gain recognition. Hedge fund beta is the common strategies shared by a group of hedge fund styles. In order to capture hedge fund beta, it requires significant skills, including strategies and implementing with necessary techniques.

Interest among institutional investors in rules based hedge fund strategies is growing. Investing in hedge funds allows many investors to tap into new, uncorrelated return source as an efficient and cost effective strategy. Hedge fund beta also helps the investors benchmark their hedge fund managers and portfolio constructions..................

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