Aqr Momentum Fund Essay examples

2839 Words Dec 5th, 2015 12 Pages
Overview
Momentum is a phenomenon shows that well-performed stocks continue to outperform their peers while poor-performed stocks continue to underperform. Thus, more mutual funds use this powerful strategy to draw a broad range of investors by getting higher risk-adjusted returns. AQR is a hedge fund based in Greenwich, Connecticut, offering investing products that applies price phenomenon known as momentum. This case study enables investors to get a closer look at AQR’s momentum fund.

Comparison of momentum specifications
In order to analyze the momentum effect of different specifications, stocks were divided into ‘winner’ stocks and ‘loser’ stocks according to their rankings.
From the data we can see that the decile spread
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In Exhibit 5 in the case, it is observed that UMD has correlations close to zero with Market risk premium and SMB, and a negative correlation with HML. AQR might promote its momentum portfolio by emphasizing that it’s feasible to gain higher returns with lower risks if investor simply adds momentum into portfolios using any of the three strategies, in other words, diversification. However, it is noteworthy that AQR’s retail momentum strategy used a long-only position (U) rather than a long-short one (UMD), thus the correlation mentioned above might vary in the former case. The more appropriate way to estimate the correlations is to use the performance of “U” stocks only. The re-calculated results are shown as below.
Correlation Coefficients (1927-2008) RMRF SMB HML U
U 0.934 0.607 0.098 1.000
Table 2.3 Correlation Coefficients
It is not surprised to see that the actual correlations between U with the other strategies are all positive with relatively significant magnitudes, indicating that the potential selling point of diversification is not applicable to AQR’s retail momentum strategy.

Purpose of AQR’s Momentum Indexes
It is natural to draw question like what is the purpose of AQR’s momentum index. The answer is obvious that we could use it to educate

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