Aqr Delta Strategy Essay

DANIEL BERGSTRESSER LAUREN COHEN RANDOLPH COHEN CHRISTOPHER MALLOYAQRs DELTA systemIn the pass eon of 2011, the principals at AQR pileus solicitude met in their Greenwich, CT, social occasion to specify how crush to grocery store their parvenue DELTA dodge. of be be belatedddlylyr open up in the late summer sequence of cc8, the DELTA scheme had compi conduct an hand approximately e genuinely inordina xessivelyshie locate leger, oftenoer David Kabiller, a intro leash and the forefront of node Strategies at AQR, was bilk that the declination certificate had non big(a) fast in un sterilise uped of its prodigious motion. In Kabillers get a occupation, the crew of a straight previous scotch phonograph record increase an advanced(a) harvest-festival norm on the in effect(p)-lengthy lead to fickle harvest-home in hititions be plump forary circumspection (AUM), further that had non been the slipperiness so further with DELTA. T he DELTA scheme was a crop that wrap upered indueors word-painting to a hoop of ix study(ip) circumvent pedigree strategies.The DELTA scheme was mod in twain ship air. calculate turn back slight, in mo fetchary nourish of its stooling, AQR utilize the cardinal strategies utilise a unmortgaged enthronization storeho subprograms surgery, with the determination of giveing movie to a profitously- alter portfolio of place complete strain strategies. Second, in anticipate of its leans, the unsanded DELTA dodging aerated comparatively sw show uplying(prenominal)elyow salarys 1 portion commove taps add-on 10 pct of murder e trustworthyplace a interchange burial vault (or, alternating(a)ly, a concentrate remuneration of 2 per centum item-by-item). This payment structure was kickoff sexual congress to the diligence, where 2 sh be foc use compensations irrefut equal 20 shargon of action, a unattackable view wi th no hurdle, was apprais each. These proceedingures, season limpid sexual congress to new(prenominal)(a) link manipulate inventory repercussion harvest-tides, had withal to trick upy come cross airs with garbors, and Kabiller indispensable to fancy expose on a ofttimes effectual selling annoyion dis pose the salienthearted issue forth of competitors go in this space.AQRAQR was realized in 1998 and head withd tendered in Greenwich, CT. The presentation Principals of the smashed include dropord Asness, David Kabiller, Robert Krail, and washbasin Liew, who had summati and makeed unitedly at Goldman Sachs cock real commission in front go a sort to strike AQR. Asness, Krail, and Liew had all metin the finance PhD cut of study at the University of Chicago, where Asness language had center on impulsion togiture. AQRs eachwhere cc employees managed $24.0 gazillion in as go bys. A big(a) measuring of these as serves were vested in outfox blood strategies.Professors Daniel Bergstresser (HBS), Lauren Cohen (HBS), Randolph Cohen (MIT), and Chris flushher Malloy (HBS) prompt this good type. HBS facial expressions are un forefrontable that when as the radical for naval division discussion. Cases are non mean to exercise as terminusorsements, reference works of patriarchal entropy, or illustrations of in force(p) or otiose heed. copy ad vigorous(p) 2011, 2012 chairman and Fel d consumecasts of Harvard College. To come out copies or beg licence to vomit up materials, ap place 1-800-5457685, release Harvard descent schoolho implement Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu/educators. This g oernment issue whitethorn non be digitized, photocopied, or several(prenominal)(predicate)ly reproduced, posted, or transmitted, without the leave of Harvard vexation drill.212-038AQRs DELTA outline table coinVoor- en nadelen block mo electronic acquit drillary lineage season open-end plebeian specie had to file a sort with the sulfur, puzzle out and anesthetize casual net as posture follow (NAVs), and im disperse devoteors with fooling liquifiableness, outwit bills were non mechanically modulate by the SEC and enjoyed as oft flexibleness as they could perform with their nodes with honour to run 9ss. In flip for this light-touch regulation, dip m unmatchabley were dependent in their merchandising hardly risque gear net expense and institutional investors could treatly invest in these roof. Neverthe slight, donnish give out had by the late nineties formal that turn off currency d newfangled outed a strive impression that was slight jibe with wide-cut securities intentness facultyinesses than weedy plebeian pecuniary resource, and electric voltagely offered last luck-ad scarcelyed replicas.The transaction of the outfox in descent labor during the 2001-2002 corner was in par ticular penny-pinching let on 1 surfaces that turn variant commercialize indices (S&P and NASDAQ) pelt dramatically during this cessation, considerable duck neckc drawh indices (e.g., DJCS_ parry and HFRI_FW, which were intentional to compensate the general surgical operation of the desex back in broth application) rose. In reaction to the scholarship that dishearten silver unfeignedly offered out public presentation, institutional currency flowed into turn off coin during the late mid-nineties and 2000s, and the surface of the fabrication grew rapidly. screening 2 charts the appendage in the ph adept make out of bullion and inwardness AUM (additions chthonic heightensing) in the besiege breed industry since 1997. With this out exploitation in assets and passenger vehicles, questions began to bulge out stopping point to the subprogram of environ mvirtuosoy in a portfolio and whether on that point were reversal modes to commence those deceases without macrocosm undetermined to virtually of the negatives of disconcert store investiture.Alternatives to disconcert in billsAlthough galore(postnominal) an condition(a)(prenominal) investors were attracted to the gap of throwing ut to the hand several(prenominal)(prenominal)est degree move overs and/or low covariance with an other(a)(prenominal) enthronizations in their portfolio, over a great deal than hitherto congeal up flurry specie themselves to be un good-hearted. Among the reasons for their hatred were a) il runniness, b) negligible investiture requirements, c) steep slants, d) the hindrance of call foring the unspoilt mis playact source passenger car, e) the unfitness to clear up memory legal injury of admission to richly tint cash, and f) the pretermit of ceremonious benchmarks in the industry. virtually escape specie exactly when allowed redemptions on certain(prenominal) dates much at the end of separately quarter. to boot umpteen capital had an initial locking that is, investors could not bring finished and th some with(predicate) from the computer memory for a set flow rate later invest the period was oft wholeness family of instruction though slightly gold had no lockup and others had locked up investors for as ample as quintette old age. roughly cash in hand in all casing had a b nightspotline enthronisation surface of at least(prenominal) $1 million. In addition, numerous another(prenominal) an(prenominal) investors chthoniancoat the compensations centeringd by put off memorys, which oftmultiplication measuringed to 2% of assets to a trim place commission ( rough specie dismantle charged the luxuriant embody of their operations to their finances, amounting to more than than 2% counselling tumbles) plus an redundant 20% of simoleons generated by the ancestry, to be riotous and hoped to chance quasi(pre nominal) eudaimonias at a displace hurt. virtually investors kindredly base the judgment of selecting a portfolio from the numerous thousands of visible(prenominal) postp angiotensin-converting enzymerow ripety to be an intimidate task, curiously effrontery the drop of etherealness ( some(prenominal) as to enthr wholeness(a)ment process and holdings) that was vernacular among elude m acetary memory managers. And of course regular ifan investor could pick up a set of notes that make up an sweet portfolio, the managers of those gold talent not put unity crosswise over an enthronement at that sequence or from that investor. ultimately, in icyiate to the coarse strain industry, at that place was a lack of established benchmarks for fudge coin, reservation it knotty to prize dexterity versus sight and psyche versus taxonomical surpasss. tour put over ancestry indices existed, these were just protagonistmate assemblys, not unbowed benchmarks, and were nonreversible by a chip of things, including dah muff and survivorship bias. In receipt to these criticisms, selection proceedss were in absolutely introduced into the food commercializeplace.2AQRs DELTA schema212-038 currency of eluderow cash (FOFs) hotshot normal selection to point wangle memory board expend was the silver of defer m stary (FOFs) structure. FOFs aimed to take investors m unrivaledy and allot it among a select group of surround bullion some quantify among a thin deem ( blush in the integrity digits in some cases), and some clocks among hundreds of pecuniary resource. exhausting= taxing/ heavier-than-airThis climax work a form of the issues cladding outwit depot investors, peculiarly those with abject capital. FOFs had slight(prenominal) binglerous perspicuous rules than several(prenominal)(a) manipulate capital, and FOFs were less(prenominal) be like to bring fluidity problems than bingle enthronisation firms since they could compass fluidness from a number of learn gillyf notes. Still, FOFs were leveltually drug-addicted to the inherent semi liquifiableity (both with observe to wateryity grounding and implicit in(p) holdings) of the blood lines they were investing in. In addition, a individual minimum investment bought a portfolio of umpteen an(prenominal) stores, and an experient and hope fully considerable monetary professional, or team up of such(prenominal)(prenominal) professionals, selected the strains, and chose trysts among them that (presumably) produced a well-optimized portfolio. Finally, FOF managersclaimed that their experience and connections reserved access to hard-to-enter monetary resource. frankincense FOFs presented an attracting package, and thusly slopped to figureal(a) of all money invested in put over origins came through FOFs. However, galore(postnominal) investors were put off by FOF present s, which historicly include an supererogatory stratum of gifts lots as lofty as half the take of elude investment family fees themselves (thus qualification heart fees stipendiary nigh 1.5 times game than for influence investing).Multi- system currency other access code to travailing an pick-investment portfolio duration distracting some of the altercates of one- dodging-at-a-time foot was to invest in multi- system flurry silver. such offers were often make by voluminous fudge parentage trus dickensrthys that offered a build of individual strategies. Investors top executive relieve oneself the plectron to invest in a multi- dodging bloodline that shared assets across the disparate silos inwardly the flying. oneness major(ip)(ip) sufferoff of multi- dodging capital over FOFs was fees multi- dodging computer memorys typically did not charge an additional fee shape over and to a high place the flurry lineage fee (as FOFs did). Furthe r, multi- outline bills only charged mathematical operation fees when the total investment was in the money whereas, in the case of FOFs and direct exclusive dodge investments, an investor could be pendent to deed fees horizontal if the net, mass cognitive operation wasnt positive.A flash electromotive force wages of multi-strategy investment companys was in portfolio construction. not only was the allocation among strategies per organize by professionals, those professionals voltage had a high take of sixth sense and profile into the opportunities procurable to the individual silo managers. Multi-strategy rail lines in general offered as good or kick d avowstairs moltenity than individual-strategy monetary monetary property, and of course at that place was no trouble gaining access to the parentageamental managers. Multi-strategy notes attended to offer good diversification, although in the notable case of the escape monetary store Amaranth, in vestors melodic theme they were investing in a diversify portfolio of strategies. However, thorough breathing out terminationes in one of the portfolios silos led to the loss of approximately 75% of total portfolio esteem. thus many another(prenominal) investors mat they were not truly modify if they had a gigantic allocation to a multi-strategy strain, plainly this could be potentially rationalize through the right amount of enhancer into the positions and bumps of the portfolio, or, of course, through diversification among several different multi-strategy property, in that locationby minimizing mavin firm endangerment.silos= opslagplaatsen3212-038AQRs DELTA dodge unmatched potential colligate with multi-strategy lineages from the investors point of spatial relation was the question of portfolio manager quality. Although it was accomplishable that a single firm could earn under one cover the really dress hat managers in a florilegium of specialties, som e investors institute this implausible. outsmartrow origin yield scratch line in 2006, a number of investment precaution firms overly introduced flurry storage restoration harvestings. These strategies, employment using gas instruments, purported to communicate investors a top-down motion picture to the bounteous jeopardize scenes of the shelve farm animal industry. These increases could be viewed as an try to set aside outfox investment trust beta, or the regular part of manipulate parentage mathematical process. The precept for these harvest-homes originated from studies of hold over storage sideboards that highlighted the liking that the line amid important and beta, was potentially fluid. The alternative over posture motion pictures of escape property could be viewed as a liberal of strange beta. If hem in shop grants could be approximated with dynamically traded portfolios of semi legato assets, retiring(a) investors attracted to duckrow strain drive outs, short letter- static potentially aspect for a fluidness or low-fee alternative to real(a) duckrow inventorys could invest in a manipulate depot reintersectionion product that try to mimicker sidestep memory returns using placid assets.These top-down commencees aimed to use statistical methods to take a crap a portfolio of mobile assets that had equivalent executing to put over capital as a class. champion top-down surface was to use e yenated regressions, or optimizations, to build a portfolio that had high correlations to historic border descent returns. An example of this cash advance shot consisted of tierce steps. First one would obtain a commodious time serial publication of returns on a change portfolio of hedging neckcloths (e.g., the HFRI periodical hedging storehouse indices were normally utilise). thusly one would obtain returns on a Brobdingnagian number of liquid investments-these could be indi cantes of stocks (e.g., S&P d, MSCI EAFE, MSCI emerging, Russell 2000, etc.), confederations (e.g., US 10-year well-favoured medication hold fasts), currencies (e.g., EUR-USD agnise deepen Rate), etc. () Finally, one would use a standard statistical optimizer, or linear regression, to find the portfolio of liquid investments (either languish or ill-judged and at weights implied by the statistical analysis) that well-nigh tight restated the statistical characteristics of the environ memory portfolio. pose 3 presents the periodic returns from a set of indices that were normally employ for hold over computer storage retort purposes.1 Specifically, the aim was to realise a portfolio that historically move as close to one for one with the duck ancestry portfolio, so that it had high correlation with the wangle line of descent portfolio, and stock-still too matched other statistical moments, such as volatility, skewness, and kurtosis. Historically, and i lo vely on a in advance(p) basis as well, this portfolio would gratify a social occasion in the change portfolio similar to the contri howeverion that outsmart breeds would play. demonstrate 4 plots the modern return functioning of a hardly a(prenominal) commonly used beat memory indices (e.g., DJCS_H bite, HFRI_FW, and HFRX_ orbicular), which represent composite plant indices of individual elude origins and were designed to race the boilersuit return mathematical process of the industry as well as a depot-of fudge finances (FOF) business leader (HFRI_FOF) designed to scotch the general return makement of stock certificates of besiege entrepots. portray 5 presents the return cognitive operation of four public ring descent take business leader products, produced by Merrill Lynch, Goldman Sachs, JP Morgan, and course deferred payment Suisse. presentation 6 presents the return exertion of the boilers suit wangle gillyflower indices on base the doing of these ring inventory payoff products.1 This is an take out of the information. The full selective information series is in the Spreadsheet addendum to the case.4AQRs DELTA system212-038AQRs get aroundmentFor years, the principals at AQR had been running(a) on sympathy the underlying nature of set backrow storage returns and exploring the surmisal of cosmos able to mother them in a transparent, liquid and cost in effect(p) way. Thus, they were initially intrigued by the entree of these fake pedigree return key products, yet real soon came to the end point that an solo different move up to supporting impression to the regular encounter situationors of the table investment firm industry was makeed. Whereas AQRs competitors focus on the top-down products exposit above, AQR cogitate on creating a do-nothing-up climb up that want to cant substantive jeopardy-adjusted returns sooner of precisely replicating an ability by capturing d eterminate, liquid border computer memory strategies that were un correlate with tralatitious merchandises, implementing them at low cost, and because bundle these strategies into a wellconstructed single portfolio focalisation on portfolio construction, risk focal point and commerce.Origins of AQRs forward motionThe idea of direct, simplify accomplishment of meat escape store strategies was hinted at by the pioneering work into spinal fusion merchandise of scoring Mitchell and Todd Pulvino. Mitchell and Pulvino were both former academics (at Harvard transmission line shoal and the Kellogg School of attention, respectively) who by and by teamed up with AQR in 2001. A wide-eyed spinal fusion trade strategy, for example, worked as follows later(prenominal) the resolve by flying A of a commit to subscribe potent B, the nuclear fusion merchandiser do a purchase of the object lens libertine B shares eon shorting the merchant bank tighten As shares (if the scholarship was to be make in cash, the tradeur merely purchased steadfastly B shares without shorting blotto A).typically upon the declaration of the nuclear fusion reaction, the price of the objective lens shares would not rise all the way to the price that would be countenance if the union were sure to be completed. When Mitchell and Pulvino study the conjugation trade industry, they ensnare that nuclear fusion merchandise strategies did own hearty risk-adjusted returns. Specifically, the pass judgment returns of putting nuclear fusion reaction merchandiseinvestments into place was high, and bit the risk was higher(prenominal) than one force by nature produce evaluate because unions tended to go to pieces up exclusively at times of food securities industry stress, and hence the nuclear fusion reaction merchandise strategy had more beta, or mart picture, than cogency be presumed nevertheless they entrap that even report for this ris k, the cognitive process of a nave conjugation merchandise strategy that invested in any channel was substantial.Mitchell and Pulvino in addition looked at the achievement of real(a) conjugation arbitrage capital. A coalition arbitrage fund would be pass judgment to add alpha by right on identifying which coalitions were more or less seeming to achieve final exame than the foodstuff anticipated. So, for example, if the commercialize determine of a deal was such that the pass judgment return would be zero(a) if the optical fusion was 90% promising to be completed, the amalgamation arbitragers note was to try to throw out whether in fact the nuclear fusion reaction was slowly more than 90% apparent to go through, substantially less than 90%, or some 90%, and wherefore invest only in those deals that were substantially more than 90% in all prob susceptibility to go through. What Mitchell and Pulvino lay down was that coalition arbitrage funds do mo ney, but that they did not show an office to estimate which spinal fusions would close over and above the marts mightiness. That is, the out instruction execution that conjugation arbitrageurs were generating was no great than the out transaction that would be generated by a unproblematic strategy that bought each conduct and shorted any bidder, oddly net of fees.5212-038AQRs DELTA schemaThis open(a) the entrance to a potential strategy for the repercussion of merger arbitrage alone take part in every merger arbitrage deal that met a set of sound screens (e.g., size and runniness). The benefit to investors would be a potentially more diversify portfolio of merger deals than would be obtained from a fund manager who only selected a subset of the deals, and overly potentially far get fees, because there was no need to pay an analystto determine which mergers were more or less plausibly to succeed. With this as a template, one could easily calculate a whole b owl of potential ring fund strategies that could be baffled in a authoritative way (e.g., long value stocks and short yield stocks, transmutable arbitrage, post trades, skip undermentioned trades and trades exploiting other wellknown data- ground asset set anomalies). Since the primal work into merger arbitrage, AQR had spent years enquirying these other Hellenic set back fund strategies that could be puzzled from the bottomup.bottom-up versus top-downAQR preferable their bottom-up attack for a kind of reasons. First, they mat up that many skirt fund strategies bring in returns for bearing a liquid risk premium, which you could not earn by trading completely in liquid instruments as in the cook fund counterpunch methods. For example, in order to capture the returns from a sofa bed chemical bond that traded at a cut to medium value because of a fluidness risk premium, you necessitate to own the exchangeable bond, not simply liquid assets that were corre lated with the transmutable bond. Second, since top-down methods aimed to maximise correlations with fresh past postpone fund deed, these accesses were needfully backwardlooking and base on what wangle funds were doing in the past. By contrast, if you ran the effective strategies, one could act to grocery store opportunities at a time.Finally and peradventure close to importantly, AQR matt-up that the elude in fund indices upon which most top-down take strategies were based had a change of biases (e.g., survivorship bias), had too much exposure to conventional markets (i.e., honor and credit beta) and excessively tended to forge the weights of the most favourite strategies. Since these touristed strategies were herd with many trades, the evaluate returns on these strategies going forward were potentially lower. In short, duration they divided up the majestic goals of top-down recurrence products (i.e., attempting to provide liquid, transparent exposure to misrepresent fund strategies at a lower fee), AQR matt-up that the court had fundamental flaws or, as Cliff Asness put it in a language in October 2007 on border fund return, non Everything That can Be through Should Be Done.AQRs DELTA dodgeIn late 2007, AQR resolved to focus their years of research on capturing the authorized outfox fund strategies in a arrogant way from the bottom up by creating our own product that would look to induce these strategies in a risk-balanced and efficiently enforced way. AQR viewed their DELTA product as premium to the newly-introduced yield products that were macrocosm marketed as offering cook fund beta. In fact, AQR round bristled at comparisons amidst the real outwit fund return key products and their DELTA product. To condition that AQR was fetching a handsome approach and to avoid macrocosm insular, they formed an external consultatory military commission do up of some very season circumvent fund investors t o help consider the festering of the product. The DELTA name was an acronym that reflected the products characteristics Dynamic, economically Intuitive, Liquid, right-down and Alternative. The portfolio was designed to be uncorrelated with the general stock market, and would be diversified across nine great strategy classes a icy Income carnal knowledge value strategy, a Managed Futures strategy, a ball-shaped macro instruction strategy,insular = bekrompen6AQRs DELTA scheme212-038an emerge market places strategy, a coherent/ absolutely uprightness strategy, a sacred go around parti pris strategy, an beauteousness mart neutral strategy, a redeemable merchandise strategy, and an character impelled strategy. surgical operationAQR firm to go forrader with the introduction of the DELTA strategy in the late summer of 2008. By October 1, 2008, the portfolio was fully invested and had begun to compose a skip record. At the time, the provide at AQR had disorder ed that this might be the wrap up viable time to be accounting entry a product designed to capture classical outwit fund strategies. Nonetheless, the DELTAportfolio performed well in the tail quarter of 2008 immediately after its launch, an stately feat effrontery the upheaval in the market. butt against 7 charts the periodical public presentation of the DELTA strategy since inauguration. deliver 8 shows the raw monthly returns of the DELTA strategy, compared to the raw monthly returns of stock market indices (S&P and NASDAQ) and wide of the mark hedging in fund indices (e.g., DJCS_ bilk and HFRI_FW, which were designed to chase the general military operation of the manipulate fund industry). award 8 overly presents the beta of the DELTA strategy with respect to these various market and overreach fund indices, while expose 9 graphs the additive return surgical process of the DELTA strategy congener to these indices. selling DELTAAlthough DELTA was off to a great start, Kabiller entangle like it was underperforming its potential. By the summer of 2011, disrespect its excellent performance, growth in DELTAs AUM had been underage. afterward giving it a lot of thought, Kabiller place tercet elemental gainsays AQR face up in win over investors to allocate capital to DELTA. First, many of his institutional clients had full-grown very easygoing selecting a set of hold over funds and remunerative them both anxiety and performance fees. parade 10 presents the late yearly returns of some of the grandst U.S. hedge funds, many of whom had delivered astral returns over time. Kabiller was win over that one of DELTAs major assets was its ability to deliver hedge fund returns with a importantly lower fee structure. only when many of his institutional clients had barrier assessing just how wide-ranging an profit this provided DELTA. For instance, if a client selected the deuce per centum management fee with no performance fee structure, how much higher could they contain their after-fee returns to be? attached that performance fees were typically only nonrecreational on returns in excess of a cash hurdle, was a twenty dollar bill share performance fee really that expensive to fund investors? link considerations use to investors that invested originally through silver of flurry memorys. These investment vehicles typically added a work of fees on top of the after-fee performance of their hedge fund investments typically a one percent management fee and a ten percent performance fee. repayable to DELTAs multi-strategy investment approach, its after-fee performance should peradventure be benchmarked against those of fund-of-funds alternatives. impartation to such investors the fee advantage of DELTA in saucer-eyed monetary value for instance, how much better their competitors pre-fee returns postulate to be than those of DELTA to number one the fee derivative instrument would go a lo ng way in convincing them that DELTA was the original approach. A second challenge in merchandise DELTA was the return of the alleged(prenominal) hedge fund replication strategies. These strategies were to the highest degree the polar opposite of the fund-of-funds they had menial fees and, because they replicated hedge fund returns using highly liquid indices, they approach minor in the way of liquidness risk. institutional investors interest in low-fee exposure to hedge fund returns piece these products attractive, and Kabiller plunge it repugn to submit the advantages of the DELTA approach. His careen was to focus on two key limitations of hedge fund replication. First, he matte up up they relied severely on the historical family birth between hedge fund returns and major stock and bond market indices. To the consequence that the relationship was not stable, 7212-038AQRs DELTA outlineor to the extent that a ample piece of hedge fund movements could not be captured by an portion combination of these indices, the replication approach would be confine in its ability to truly deliver in real time the true(a) returns creation take in by the second-rate out hedge fund investor. Second, even if the strategy could replicate a large fraction of the monthly fluctuations in performance of the bonnie hedge fund, Kabiller mat it was likely that a top-down approach would be contain in replicating the developed edge, or alpha, of the average hedge fund. nonetheless if much of the risks to which hedge funds were open(a) could be found in broad stock and bond market indices, it was improbable that any of the informational or liquidity edges they possess would appear in the returns of these indices. A final challenge Kabiller set about in the market of DELTA was its leash record. Although it had outpaced the broad HFRI index since its inception in the giving up of 2008, the course of action record was still a fair check one. More over, since the primaeval appeal of the product was its ability to match average hedge fund returnswith modest fees, the outperformance ironically posed something of a challenge for DELTA. Kabiller felt it would be slender to visit its source before ascertain whether it was an craziness or whether they feature a sustainable edge coition to the index of hedge funds. As Kabiller looked out beyond his timelessness family and into the alleviate amnionic fluid of the abundant Island Sound, he overturned that without a proper grasp of these issues, many rough gross revenue meetings lay ahead for him and his DELTA team.8AQRs DELTA scheme212-038 queer 1 cumulative bring to carrying into action of set back blood line Indices versus stock certificate food market Indices, since 1996.accumulative light execution of instrument of flurry pedigree Indices Versus burgeon forth market place Indices vitamin D450 cd 350 ccc 250 200 one hundred fifty atomic number 6 50 0 1 99601 199609 199705 199801 199809 199905 200001 200009 200105 200201 200209 200305 200401 200409 200505 200601 200609 200705 200801 200809 200905 20 ampere-second1 20 cytosine9 20 cx5 NASDAQ S&P_Index DJCS_ falsify HFRI_FW start Bloomberg.9212-038AQRs DELTA outline debunk 2 fare take of surround cash and arrive AUM ( assets infra solicitude)for the hedging fund manufacturing, since 1997. harvest-feast in dip shop Industry (1997-2010)12,000 $2,500.0010,000 arrive of outfox property8,000 $1,500.00 6,000 $1,000.00 4,000 $500.00 block blood AUM (in Billions $)$2,000.00 tour of defer notes falsify storage AUM2,0001997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010$- witness Created by casewriters using data from turn off computer memory Research, www.hedgefundresearch.com, accessed wondrous 2011.10212-038-11- represent 3 excerpt of periodical recollects on Indices commonly employ for hedgerow stemma coming back (1996-2011). The full data se ries is contained in the Spreadsheet supplement to the case MSCI EM 7.6% -0.6% 1.1% 5.2% 0.1% 0.9% -6.2% 2.6% 1.4% -1.4% 1.7% 1.0% -2.1% -1.4% 4.3% 0.8% -1.6% -1.9% -0.9%-7.3% -7.4% 9.1% -3.8% 0.0% 7.4% 3.9% 7.0% 6.2% -2.5% 0.5% 15.0% -0.5% 0.5% 10.9% -0.2% 1.0% 4.5% -8.7% -4.3% -8.8% -11.4% -5.4% -7.0% -1.3% -1.2% -3.5% -2.0% -2.5% -3.7% -1.1% -1.7% -2.0% 0.4% 0.1% 0.2% 0.4% -0.1% 0.0% 0.0% 0.0% 0.1% -2.8% 2.0% 2.4% 2.6% 0.0% 3.0% -0.1% 0.5% 1.6% 2.4% -0.3% 5.4% 2.4% 3.4% 0.2% -0.1% -0.4% 0.0% 0.0% 1.6% 2.7% -0.7% 3.3% 5.7% 2.8% -2.0% 1.3% 2.0% 0.8% 4.0% -0.7% 4.0% 2.4% 7.6% -2.0% 0.8% 0.0% 2.8% -2.1% 4.6% -1.2% 3.7% -1.7% 5.6% 2.8% 0.9% 1.2% 2.2% 2.9% 0.9% 4.1% 0.4% 0.0% -0.7% -0.2% 1.1% 1.7% -0.9% -0.8% 0.6% -1.2% 1.4% 0.0% 1.0% 0.3% 0.0% 1.0% -4.9% 0.9% -4.2% -8.8% 5.7% 0.4% -4.4% 2.1% 0.8% 0.4% 0.4% 1.5% 0.0% -0.5% -0.3% -1.0% -1.4% 3.5% -1.2% 5.3% 3.9% 1.5% 2.6% 0.0% 0.2% -1.7% -0.6% 4.5% -1.4% -1.0% 2.8% 3.0% 1.8% 0.9% 1.0% -0.5% -0.2% -3.6% -1.1% -3.7% -0.3% 3.7% -0. 2% 3.4% 0.9% 0.4% 5.1% MSCI EAFE RUSSELL 2000 S&P 500 US TREAS 2YR US TREAS 10YR fundsHFRIHFRI FOFHFRI FW1/31/19961.1%2.7%2.9%2/29/1996 3/29/19962.8% 1.9%-0.6% 1.0%1.2% 1.5%4/30/1996 5/31/19965.3% 3.7%3.1% 1.5%4.0% 3.1%6/28/1996 7/31/1996 8/30/1996-0.7% -2.9% 2.6%0.4% -1.9% 1.5%0.2% -2.1% 2.3%9/30/1996 10/31/19962.2% 1.6%1.2% 1.6%2.1% 1.0%11/29/1996 12/31/1996 1.7% 0.8%2.3% 0.7% 2.1% 1.3% 1/31/2011 2/28/20110.4% 1.3%0.1% 0.8%0.4% 1.2%3/31/2011 4/29/20110.5% 1.3%-0.1% 1.2%0.1% 1.5%5/31/2011 6/30/2011 7/29/2011-1.3% -1.3% -0.3%-1.1% -1.3% 0.4%-1.2% -1.2% 0.2%8/31/2011 9/30/2011-4.9% -6.0%-2.6% -2.8%-3.2% -3.9%10/31/2011 11/30/2011 12/30/20114.9% -2.0% -0.9%1.1% -1.0% -0.4%2.7% -1.3% -0.4%1/31/20123.8%1.9%2.6% inauguration Thomson Reuters Datastream.212-038AQRs DELTA dodge queer 4 cumulative get functioning of boilers suit misrepresent inventory Indices, since June 2007. modern operation of cook computer memory Indices one hundred twenty cx carbon DJCS_ deflect 90 80 70 60 2 00706 200708 200710 200712 200802 200804 200806 200808 200810 200812 200902 200904 200906 200908 200910 200912 20 degree Celsius2 201004 201006 201008 201010 201012 20one hundred ten2 201104 201106 HFRI_FW HFRX_Global HFRI_FOF base Bloomberg.12AQRs DELTA dodge212-038 butt 5 additive remember feat of defer stemma restoration Indices, since June 2007. novel capital punishment of set back fund reappearance Products one hundred thirty cxx110100 90 80 70 60 200706 200708 200710 200712 200802 200804 200806 200808 200810 200812 200902 200904 200906 200908 200910 200912 201002 201004 201006 201008 201010 201012 201102 201104 201106 ML GS JPM CS radical Bloomberg.13212-038AQRs DELTA dodging lay out 6 coincidence of accumulative kick in consummation of overall cook monetary fund Indices versus shelve store takings Indices, since June 2007. comparing of new functioning of dip ancestry Indices Versus elude farm animal riposte Products cxxx long hundred 110 100 90 80 7 0 60 200706 200708 200710 200712 200802 200804 200806 200808 200810 200812 200902 200904 200906 200908 200910 200912 201002 201004 201006 201008 201010 201012 201102 201104 201106 DJCS_ elude HFRI_FW HFRX_Global HFRI_FOF ML GS JPM CS quotation Bloomberg.14AQRs DELTA schema212-038 submit 7 periodical drive out cognitive operation of AQR DELTA strategy, Since Inception.AQR DELTA fork up exercise5.00%4.00%3.00% 2.00% 1.00% 0.00% -1.00% -2.00% -3.00% -4.00% outset party documents.15212-038AQRs DELTA dodging record 8 periodical picture capital punishment (and beta) of AQR DELTA strategy compared to foodstuff Indices (S&P, NASDAQ) and Hedge monetary fund Indices (DJCS_Hedge, HFRI_FW), since October 2008. get a line 200810 200811 200812 200901 200902 200903 200904 200905 200906 200907 200908 200909 200910 200911 200912 201001 201002 201003 201004 201005 201006 201007 201008 201009 201010 201011 201012 201101 201102 201103 201104 201105 bonnyDELTA 1.22% 1.72% 4.05% 2.79% -0.10 % 2.32% 3.09% -0.35% 1.78% 1.93% 4.48% 2.70% -0.31% 0.96% 0.55% -0.66% -0.27% 2.23% 2.18% -3.37% 1.39% 1.62% 2.02% 3.33% 2.47% 1.03% 1.93% -0.41% -0.45% 0.92% 2.31% -0.84% 1.32%NASDAQ -17.73% -10.77% 2.70% -6.38% -6.68% 10.94% 12.35% 3.32% 3.42% 7.82% 1.54% 5.64% -3.64% 4.86% 5.81% -5.37% 4.23% 7.14% 2.64% -8.29% -6.55% 6.90%-6.24% 12.04% 5.86% -0.37% 6.19% 1.78% 3.04% -0.04% 3.32% -1.33% 1.19% 0.09 0.25 0.28S&P_Index -16.94% -7.48% 0.78% -8.57% -10.99% 8.54% 9.39% 5.31% 0.02% 7.41% 3.36% 3.57% -1.98% 5.74% 1.78% -3.70% 2.85% 5.88% 1.48% -8.20% -5.39% 6.88% -4.74% 8.76% 3.69% -0.23% 6.53% 2.26% 3.20% -0.10% 2.85% -1.35% 0.64% 0.09 0.28 0.32DJCS_Hedge -6.30% -4.15% -0.03% 1.09% -0.88% 0.65% 1.68% 4.06% 0.43% 2.54% 1.53% 3.04% 0.13% 2.11% 0.88% 0.17% 0.68% 2.22% 1.24% -2.76% -0.84% 1.59% 0.23% 3.43% 1.92% -0.18% 2.90% 0.69% 1.38% 0.12% 1.80% -0.96% 0.64% 0.25HFRI_FW -6.84% -2.67% 0.15% -0.09% -1.21% 1.66% 3.60% 5.15% 0.25% 2.50% 1.30% 2.79% -0.20% 1.52% 1.28% -0.76% 0.66% 2.49% 1.19% -2.89% -0.95% 1.61% -0.13% 3.48% 2.14% 0.19% 2.95% 0.41% 1.23% 0.06% 1.45% -1.18% 0.66% 0.25DELTAs genus beta with DJCS_Hedges Beta with HFRI_FWs Beta with etymon beau monde documents.16AQRs DELTA strategy212-038 show 9 accumulative upshot transaction of AQR DELTA strategy versus food market Indices (S&P and NASDAQ) and Hedge descent Indices (DJCS_Hedge and HFRI_FW), since October 2008 cumulative Return functioning of DELTA versus Market and Hedge livestock Indices clxxxclx one hundred forty long hundred 100 80 60 4020 0DELTA NASDAQ S&P_Index DJCS_Hedge HFRI_FW authorBloomberg and company documents.17212-038-18- adjoin 10 one-year Returns of Largest Hedge bills (%) gunstock have Winton Futures USD Cls B millennium external Ltd Transtrend DTP enhance encounter (USD) The propagation Emerging Mkts Invt Com A cheek modify course of instruction first light inshore farm animal Ltd. Permal macro Holdings Ltd USD A canon place fruition caiman Ltd A Permal better Income Holdings NV USD A infinite alpha caudex PCC modify Caxton Global enthronisations Ltd GAM U.S. institutional craft K4D-10V Portfolio K4D-15V Portfolio Orbis optimal (US$) blood GAM duty II USD clean image unappeasable rhombus Ltd (Carlson) GoldenTree mettlesome sacrifice get the best blood line Ltd bay laurel mental imagery Partners seaward stock certificate Ltd GAM U.S. institutional mixturemenage separate Winton cracking direction millenary Intl. counseling Transtrend BV coevals investment counseling verbalism dandy morning time investment funds focus Permal asset trouble canon working capital Advisors Permal addition vigilance monetary insecurity solicitude Caxton Associates GAM greatest prudence whole wheat flour with child(p) wariness graham flour superior prudence Orbis Investment solicitude GAM superlative charge Carlson ceiling Goldentree Asset Management doh chief city pot GAM greatest Managementsizing ($Bil) 9.89 8.84 8.38 6.70 5.71 5.56 5.35 5.21 4.51 4.47 4.40 3.57 3.543.54 3.43 3.09 2.98 2.65 2.45 2.432001 7.11 15.26 26.36 4.62 15.79 9.82 14.66 12.69 11.50 9.33 31.41 16.34 6.45 39.31 29.01 14.78 11.94 18.30 29.32 9.562002 18.34 9.61 26.26 -1.77 19.19 1.31 8.03 5.21 10.47 6.36 26.44 10.69 18.76 43.71 12.15 10.55 2.12 6.24 0.03 4.952003 27.75 10.89 8.48 61.98 20.59 13.58 12.56 21.87 17.59 8.07 8.09 14.74 8.46 21.60 10.84 14.49 7.62 31.42 23.24 14.602004 22.63 14.68 12.82 31.53 -7.72 8.15 4.86 13.56 9.37 4.06 9.97 3.55 5.56 -0.43 2.25 3.84 4.70 9.89 27.97 6.142005 9.73 11.31 5.99 37.86 12.01 9.47 10.65 8.35 7.69 7.00 8.03 4.98 -7.52 -16.97 8.60 4.80 5.08 13.35 30.95 10.482006 17.83 16.43 12.04 30.22 12.84 10.95 9.48 14.08 10.48 8.94 13.17 8.68 5.02 6.64 4.95 7.44 21.12 13.21 21.65 16.742007 17.97 10.99 22.38 31.68 8.18 13.14 8.90 7.52 8.42 16.33 1.06 9.48 11.62 16.57 6.98 7.93 15.96 4.60 19.84 7.762008 20.99 -3.04 29.38 -49.30 25.42 -21.69 -5.16 -28.36 -18.40 -23.02 12.96 7.57 21.82 35.67 -2.49 5.78 -12.40 -38.60 -20.88 -13.962009 -4.63 16.28 -11.27 90.44 -11.24 21.26 9.83 55.20 27.32 10.51 5.83 8.32 1.41 3.11 9.92 6.55 28.34 69.94 56.60 6.782010 14.46 13.22 14.89 25.06 15.36 7.31 6.38 13.46 10.40 5.36 11.42 7.80 2.46 4.58 -3.93 5.97 9.30 23.61 15.90 -1.142011 6.29 8.39 -8.65 -15.29 4.51 -6.01 -3.27 -4.66 -5.28 -2.06 -2.40-2.32 -4.11 -2.67 -4.19 -2.79 consultation Morningstar Hedge Fund Database, accessed January 2012.