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Wharton Leader
The Long and the Short of It
By Han Hu
Cliff Asness, co-founder and managing partner of hedge fund AQR Capital,
puts financial research to work for institutional investors.
Once a financial tool only for the very rich and well
connected, hedge funds have proliferated in recent
years. With more than 8,000 funds in existence, the
industry is becoming increasingly crowded.
And yet, for the average American investor, hedge funds are a
mysterious business—how they are managed, and even how to
access them. A Wharton alumnus is helping to change that.
In 1998, Cliff Asness, W'88, E'88, co-founded one of
the largest hedge funds in the world, Greenwich, CT-based
AQR (Applied Quantitative Research) Capital, which manages
more than $23 billion. Most of those billions do not belong
to the elite individual investors who dominated hedge
funds in the past, but to institutional investors—especially
university endowments and public pension funds.
Asness and his partners founded AQR just as the
Internet was bubbling—a seemingly unfortunate time,
when the quantitative rigor that is AQR's hallmark seemed
stodgy compared to the freewheeling valuations in the new
economy. In its first years, AQR leaked money, losing 60%
of its value. While AQR's institutional investors stood their
ground, many private investors were abandoning other
hedge funds.
By 2001, Forbes called the hedge fund industry a folly:
"You don't have a hedge fund to brag about at lawn parties?
That could be because you're too timid to swing for
the fences, as these private investment partnerships often
do with leverage and exotic derivatives. It could be because
you are not well connected... Maybe you are not rich
enough... Or maybe you are not in a hedge fund because
you know better."
In fact, it was the perfect time for AQR. In 2000 Asness
had written a paper of his own—"Bubble Logic," a takedown
of nonsensical, unsustainable stock prices—that was
never published but ended up being both prescient and influential.
It was passed among money managers, read in academia,
and quoted in the business press.
And Asness turned out to be right. The power of AQR's
market-neutral investment strategy is now benefiting a wider
swath of investors who were once left to ride out rough
patches in the economy unprotected.
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