Clifford Asness, along with Robert Krail, John Liew, and David Kabiller set up AQR (Applied Quantitative Research) Capital Management in 1998. All four founding principals of AQR Capital Management were part of Goldman Sachs prior to launching the firm. At the time of launch, the hedge fund came under spotlight for having the largest start-up capital of $1 billion. As of 30^th June 2011, AQR Capital is reported to have $41 billion in assets under management.

The firm introduced its first mutual fund in 2009 and since then has launched many additional funds. The funds aim at providing mutual fund investors exposure to innovative and alternative strategies. AQR Funds include Diversified Arbitrage Fund, Managed Futures Strategy Fund, Risk Parity Fund, Momentum Fund, Small Cap Momentum Fund, International Momentum Fund, International Equity Fund, and Global Equity Fund.

AQR Multi-Strategy Alternative Fund is the most recently launched mutual fund of AQR Capital Management. It started operations on 18^th July 2011 with $20 million as initial capital. The fund seeks to realize positive absolute return in the long run by holding a diversified portfolio of alternative strategies which are not traditionally offered by hedge funds. The fund provides exposure to nine types of alternative strategies which are Event Driven (including Merger Arbitrage), Long/Short Equity, Global Macro, Emerging Markets, Dedicated Short Bias, Managed Futures Fixed Income Relative Value, Equity Market Neutral, and Convertible Arbitrage.

AQR Capital Management is an employee-owned capital management firm which primarily focuses on institutional investors such as endowments and pensions. The firm manages client-focused equity portfolios, equity and fixed income mutual funds for clients, and hedge funds. Moreover, it extends its services to investment companies, charitable organizations, pooled investment vehicles, and state or municipal government entities.

The investment approach adopted by Asness at AQR Capital Management is quite complex and different from traditional styles of investment adopted by hedge funds. In the simplest form, Asness tries to understand the relationship between risk and reward. Asness, Krail, and Liew initially developed a model as employees of Goldman Sachs which combined Fama’s and French’s insight on value investment and Asness’ insight on momentum. The complex computer-based model identified the cheapest value stocks which had just started increasing in momentum or value by making use of up-to-the-minute data.

As the name indicates, ‘Applied Quantitative Research’ Capital Management considers global quantitative research as being an integral part of their investment strategy. The firm makes use of algorithms and computer models which help them identify various commodities, stocks, bonds and currencies to invest in.

The investment decisions are made on basis of global asset allocation, security selection models and arbitrage which are executed through proprietary trading and risk management systems. Asness firmly believes in following a systematic and orderly pattern of investment in order to achieve long-term success and effectively manage risk.

Asness is a strong believer in diversification of assets in order to reduce risk. None of his holdings make up 1% or more of his portfolio. The investment products range from ‘aggressive high volatility market-neutral hedge funds’ to ‘low volatility benchmark-driven traditional products’.

Clifford Asness was never interested in Wall Street before his father advised him to join University of Pennsylvania instead of law school. He was never a serious student in school but surprisingly attained good marks on his SATs and was able to get admitted in University of Pennsylvania. He graduated summa cum laude with dual degrees in engineering and economics. The portfolio theory in finance captured his attention and provoked his interest. He applied to University of Chicago for PhD in financial economics. There he met his source of inspiration Eugene Fama, the father of efficient market hypothesis. He worked as his teaching assistant for two years. After graduation in 1994, he joined Goldman Sachs.

At Goldman Sachs he was asked to set up a quantitative research desk which he did after inviting Robert Krail and John Liew, whom he knew from University of Chicago, to join him at Goldman Sachs. There he devised a computer model based on the value investment philosophy of Eugene Fama & French and Asness’ insight on momentum. The model which aimed at determining value stocks with an upward momentum, not only was helpful with stocks, but also different other commodities, currencies and even the entire economies. In 1995 Goldman Sachs made Cliff Asness in charge of an internal hedge fund with few clients and $10 million as assets. In the first year, this market-neutral hedge fund which was named the Global Alpha Fund returned 140%. Owing to its high performance, Goldman Sachs began to market the fund to attract new customers. By the end of second year, Asness along with his colleagues were able to generate $7 billion in the fund which was then called Quantitative Research Group for Goldman Sachs Asset Management (GSAM).

In 1998, Asness, Krail and Liew along with few other employees such as David Kabiller resigned from Goldman Sachs and established AQR Capital Management. With $1 billion as initial capital, the firm was able to make money in the first month after the launch. However, following the first month was the internet bubble. None of the extensive research or the complex models of Asness and his colleagues were able to work under the market circumstance which was not simply inefficient but was extremely inefficient. The firm went from having $1 billion to having just $400 million as assets over the 20 months following the first month. Despite the fact that most market participants were accumulating internet stocks, Asness refrained from following the herd as he believed the economy would crash once the bubble is burst. As predicted by Asness, when the internet bubble burst, the large institutions which had been loading up on internet stocks during the bubble were losing a lot of money. Following Yale’s footsteps, they started investing in hedge funds which in the time of crash, proved to be reaping better gains than the rest and in most cases generating breakeven returns. Asness’ sanguine attitude allowed him to not lose a lot of his investors, and after the bubble burst, the firm started its operations again according to the methodology that was initially promised to the public. During the period of 5 years from 2000 till 2005, AQR managed to realize annualized returns of 13.2%.

Regardless of the above average performance of AQR, Cliff Asness is also known in the financial world as a highly acclaimed author of financial articles which have often been published in Journal of Portfolio Management and Financial Analysts Journal. He is on the editorial board of both the Journal of Portfolio Management and Financial Analysts Journal. He has been awarded numerous awards which include two best paper awards from the Journal of Portfolio Management, once in 2001 and other in 2003. He has received four awards by the Financial Analysts Journal which include the Graham and Dodd award for the year’s best paper in 2003, Graham and Dodd Excellence Award in 2000, award for the best perspectives piece in 2004 and Graham and Dodd Reader’s Choice Award in 2005. Moreover, he has also been given the James R. Vertin Award to recognize the contribution made by Asness in the investment field through his research.

Some of his famous research papers include:

OAS Models, Expected Returns, and a Steep Yield Curve – (1993) – Journal of Portfolio Management
Why Not 100% Equities – (1996) – Journal of Portfolio Management
The Interaction Between Value and Momentum Strategies – (1997) – Financial Analysts Journal
Stocks vs. Bonds: Explaining the Equity Risk Premium – (2000) – Financial Analysts Journal
Fight the Fed Model – (2003) – Journal of Portfolio Management
Surprise! Higher Dividends = Higher Earnings Growth – (2003) – Financial Analysts Journal
International Diversification Works (in the Long Run) – (2010) – AQR Capital Management Working Paper

Among the founding principals of AQR Management are Robert J. Krail, John Liew, and David Kabiller. Prior to founding AQR along with Cliff Asness, Robert Krail was the Vice President and the Portfolio Manager of the Asset Management Division at Goldman Sachs. He developed and managed quantitative stock selection and asset allocation. When Global Alpha Fund was launched, he was its Senior Portfolio Manager. Krail met Asness at University of Chicago from where he graduated with a PhD in Finance.

Another colleague who was a part of the PhD Finance program at University Chicago along with Krail and Asness was John Liew. He was, like Krail, hired by Asness when he was asked by Goldman Sachs to set up a “quantitative research desk”. He worked at Goldman Sachs as the Portfolio Manager in the Asset Management Division where he was in charge of developing and managing quantitative strategies for global level trade stock index futures, bond futures and currencies. Similar to Asness, Liew has several published articles in Journal of Portfolio Management and Financial Analysts Journal on topics of global asset allocation and stock selection.

Prior to founding AQR Capital Management, David Kabiller was one of the most prominent members of the Goldman Sachs. He was the Vice President of the Pension Services Group and was in charge of establishing and maintaining relationships with various chief investment officers of the largest pension and endowment funds in North America. He was also creator of Goldman’s Pension & Endowment Forum. He co-authored numerous researches on topics of derivatives, securities lending, hedge funds, insurance-linked securities, and enhanced indexation.

MEDIA

Quotes:

”I was nervous telling Fama that I wanted to investigate momentum investing. But his reply was the best thing he ever said to me: ‘Sure you can write it. If the data shows something interesting, then write it.’ What Gene really believes in is empirical testing. Go where the data takes you.” – Cliff Asness (NY Times)

“Let’s be clear, it is the job and obligation of all investment managers, including hedge fund managers, to get their clients the most return they can. They are allowed to be charitable with their own money, and many are spectacularly so, but if they give away their clients’ money to share in the “sacrifice”, they are stealing.” – Cliff Asness (Yahoo! Finance)

“The President screaming that the hedge funds are looking for an unjustified taxpayer-funded bailout is the big lie writ large. Find me a hedge fund that has been bailed out. Find me a hedge fund, even a failed one, that has asked for one. In fact, it was only because hedge funds have not taken government funds that they could stand up to this bullying. The TARP recipients had no choice but to go along.” – Cliff Asness (Yahoo! Finance)

Videos:

Cliff Asness – 30^th June 2011

Cliff Asness of AQR Capital Management LLC on Bloomberg TV – 7^th October 2010

Cliff Asness: Obama Got It Terribly Wrong – Morningstar Video – 11^th May 2009

News:

AQR Capital Launches Multi-Strategy Fund – Advisor One, 19^th July 2011

AQR Capital Gets Into the Retail Act – The New York Times, 4^th March 2009

AQR hedging its bets with big mutual fund plan – Reuters, 25^th June 2009

Hedge Fund Chief Hits Back At Obama – Forbes, 5^th May 2009

Cliff Asness Is Angry. Very. – The New York Times, 21^st September 2008

The Trouble With Quants – Portfolio, 22^nd February, 2008

Dark days for hedge fund king – CNN Money, 22^nd February 2008