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Aqr’s Delta Strategy Case Solution & Answer

Aqr’s Delta Strategy Case Solution 

1.OVERVIEW

AQR Capital Management is a big name in the industry of investment management services. It started its operations in 1998 and its head office is located in Greenwich Connecticut. The company has a wide range of products to offer, such as: investment products (traditional investments to absolute return on hedge funds). To manage its wide range of risk management and information gathering systems; AQR usesa research approach, which means that the company invests in research and development. AQR has clients from different institutional investors, such as: insurance funds, pension funds, financial advisors and foundation wealth funds.

According to the previous data of 31st December 2012;the Assets Management Company had 70.6 billion assets. The core strategy of the company is to provide a well-managed and strategic management to get hedge funds, such as: low correlation to old class return, risk premium to maintain and achieve attractive leverage, liquidity aspects and risk adjustments returns within the market cycle. The competitive advantage that AQR delta has over its competitors is the amount which it charges from its clients.It follows a low price strategy that attracts the clients towards the company.

Most of the clients prefer hedge funds, because of the wide variety of hedge funds, in an inclusion to which, the clients also preferit due to the high returns and low covariance. Few alternative options which AQR has in hedge funds, are:Funds of Hedge Funds (FOFs), multi-strategy funds, and hedge fund replication.

2.PROBLEMS

The main strategic purpose of AQR Delta is to have diversified hedge funds. To collect a portfolio; AQR usesa bottom-up approach and a well-defined investment strategy to build a portfolio. As per the AQR’s delta in 2008; the company had gained an advantage,, but the hedge and traditional funds were the ones to suffer. The problem which caused this decrease in the numbers was that the AQR used risk allocation which decreased the bond between the strategies and performance during the market sell; whereas it allowed keeping diversified portfolio. The second problem was that AQR delta used the classical strategy that was correlated with the traditional market and it was difficult for AQR to finance and go for the strategy.

On the other hand; AQR delta faced the problem of changing trends and declining hedge fund strategy. Initially, when AQR started its operations;it was very successful but with the passage of time; AQR faced a decline in its funds’ performance and had a decrease in its potential due to the ever-changing trends.To survive in the market;AQR needs to make a strategy to face these issues,because it is now faced with extreme level of competition within the hedge fund and shift of market to fund replication, because it has better liquidity for investors. Whereas AQR delta was using the strategy of getting hedge funds in risk premium,to achieve which, skilled experts were required by the company needs to solve these problems to face the new trends and changes, because if it fails to solve these problems then it would be exposed to severe loss incurrences. Companies that do not follow the trends and changes, usually do not survive in the industry.

3.ALTERNATIVES SOLUTIONS

AQR has alternative strategies to follow on the grounds of Alpha and beta, minimum investment, liquidity and diversification, which are given below:

  • Alpha and beta exposure.
  • Initial minimum investment.
  • Minimum talent selection and incentive provision.
  • Comparison of liquidity.
  • Niche market.

Now the strategies are discussed below:

Alpha and beta exposure:

The company can use alpha and beta exposure to gain hedge funds; whereas, alpha is defined as the additional returns from the management and also it is defined as the small art of the portfolio return. Whereas, alpha has gained the popularity, because it is a new risk factor.The common strategy which most of the companies follow is hedge fund beta for a group of hedge funds. To gain hedge funds, it is necessary to have a potential strategy and enough expertise, skills and experienced employees. Institutional investors are shifting their interest towards a rule-based hedge fund strategy. Investment in rule-based hedge funds allows the investors to gain new uncorrelated returns and to achieve cost efficiency. It also allows the investors to set the standard fund managers and portfolio constructions.

According to the case study; Delta’s hedge fund strategy inhibited the beta exposures in its return due to the self-consciousness of hedge fund-managers; whereas, the hedge fund replication was different under which, hedge fund managers measured a line between the alpha and beta exposure, which is potentially liquid. The alternative systematic exposure of hedge funds could be observed as an effort to provide the exotic beta.The hedge fund replication claimed to provide top-down exposure to its investors. This exposure is also a challenge for AQR Delta’s strategy.

Diversification:

By targeting the low correlation to traditional asset classes; the funds have added the benefits of adding potentially increasing investor’s portfolio diversification. AQR offers an arrangement of products that contain high unpredictability market unbiased hedge funds with an inclusion of low volatility benchmark driven traditional funds.The funds deliver mutual fund investors with an access to the alternative strategies.

According to Mr. Kabiller; diversification is one of the core requirements of the hedge fund strategy. The company has created a fee structure for DELTA that rewards AQR when it provides both positive return and diversification to the investors.

The strategies diversified over nine board classes,include:

  • Equity Oriented strategies: This strategy seeks to take an advantage of the market inefficiencies that cause specific stocks to be under or overpriced.
  • Arbitrage strategies: This strategy seeks to capture the related mispricing between two assets.
  • Macro Strategies: Profit from dislocations in global equity, bond, currency and commodity markets, including those driven by investor’s behavior biases.

Initial minimum investment:

One of the major problems faced by AQR delta is the initial minimum investment. There is no such limit of investing in the DELTA hedge funds. If we compare the performance of the Delta strategy and different market indices, then it could be seen that the hedge fund is more diversified in terms of the minimum standard deviation of all the funds as well as their maximum mean returns………………………..

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