Development of DELTA Harvard Case Solution & Analysis

Development of DELTA Case Solution

In contrast to competitors’ hedge fund strategies, Delta strategy was introduced to capture the market. Initially, AQR was the concept of few entrepreneurs such as Clifford Asness, David Kabilor, Robert Karil and John Leiwntum; these all entrepreneurs worked together at Goldman Sachs asset management therefore, they have experience of investment and business strategies.

Delta was the new strategy by the management which was to be introduced by the company in the market, it was a product that offered investors the exposure to a basket of nine major hedge fund strategies. However, the market was full of competitors at that time and people were ready to invest in any unknown products therefore, there were a lot of benefits in attaining the market. Moreover, Delta strategy was innovative in two ways;first of all its structure was one of the factors,as AQR promised to market that it will use a well-defined investment process with high delivering exposure to a well-diversified portfolio of hedge fund strategies. Secondly, Delta’s fees were much lower than other competitors such as it charged 1% management fees plus 10%performance fees.Basically,Delta strategy was created to introduce its own products rather than acquiring others.

In late 2007, the management identified that Delta was the newly superior product among others in the market which was offered as “Hedge fund beta. The company’s considered introducing its own product for more flexibility of the investors which delivered the strategies in a risk balanced and efficient way.The goal was to create the portfolio which had high correlation to hedge fund portfolio, as well as to match other statistical factors such as instability, Skewness and Kurtosis.

Delta was a high-rated product at that time through reflecting the product’s characteristics, and this was something that no other competitors could overcome. Inventors were highly excited to get more returns they felt it was feasible to invest in Delta as it was the time when AQR’s own employees were ready to invest in Delta.On the other hand, the results of the risks were minimum by analyzing through Risk and Return calculations.

DELTA delivering beta or alpha

In mutual funds industry, generally Alpha and Beta were taken as risk calculation tool measures for the comparison of expected returns on portfolio. Alpha is considered as the performance measurement tool for portfolio manager attitude, achieving higher return on mutual fund than market, whereas Beta measures the systematic risk of security and portfolio in relation to the market.

Although quantitative analysis of hedge funds can be performed using similar metrics and processes, however it requires additional information on level complexity and risk measures i.e. Standard Deviation, Value at risk and Skewness . In the beginning of 2006, competitors of AQR introduced hedge fund replication products, designed to give a “top down” approach to the risk exposures of the hedge fund industry, and the product was termed as “hedge fund beta”. The top down approach used linear regression analysis by creating portfolio of liquid assets and then comparing it to the historical hedge returns. Relatively, AQR always focused its research to find the hedge strategies,which could provide low risk and cost efficiencies to investors. AQR termed its product as “DELTA” as an acronym .i.e.

  • Dynamic
  • Economically Intuitive
  • Liquid
  • Transparent
  • Alternative

 To further develop and guide its product, AQR formed a committee of experienced hedge fund experts for some season hedge fund investors.

AQR’s Delta strategy followed a “Bottom Up” approach, which was forward looking and provided significant risk adjusted returns.The main reason for adopting bottom up approach in contrast to top down was that it believed many hedge funds returns were earned based on having liquidity risk premium unlike in hedge replication methods. Secondly,ARQ found that replication methods had some flaws, as the model focused on the past performance of hedge funds, different bases and too much exposure to traditional markets........................

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