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Quant Group AQR Capital Management employs artificial intelligence and machine learning technologies for transaction decisions, ending a long-standing silence from one of the sector’s historic holdouts.
The Connecticut-based hedge fund, which is under $136 billion control, “supported to more machines,” after years of experimentation, founder Cliff Asnes told the Financial Times.
“When you hand yourself over to the machine, you obviously have the data talk more,” he said.
All quantitative hedge funds, including two Sigma, Man Group’s AHL division and David Harding’s Ir Winton, use computing power and algorithms to filter huge amounts of data and use sophisticated models to make investment decisions.
However, AQR previously hesitated to remove humans from trading decisions, instead favoring a rule-based computer model developed by humans, targeting explanatory market patterns.
Despite first investing in a wide range of machine learning technologies in 2018, AQR recently expanded its strategy beyond stocks to other asset classes, and is currently using technology to determine the weight given to various factors in the portfolio.
The fund also uses machine learning algorithms to identify market patterns in which it bets. However, the company says that in most cases it can find economic basis for the transaction.
Shifts have improved returns, but a complete embrace of machine learning can have drawbacks during periods of poor performance, as it is difficult to explain what is wrong to panic investors.
Asness said by adopting machine learning, the company has become “a cloudy, complicated box” rather than a “black box.” However, he admitted: “It was easy to see this was a very good time for us after a very bad time.
Revenues have improved significantly from 2020 to 2020 since Quant Winter in 2018. AQR assets fell from $226 billion in 2023 to a low of about $98 billion.
“What drives me the most is getting revenge on my enemies,” joked Asnes. “I want to show the world what we were right and what we can do better. We have a tip on our shoulders.”
The group’s top hedge fund strategy has been performing well over the past five years, with multi-strategic Apex Fund and Equity Strategy Delphi offering annual net profits of 19% and 14.6%, respectively, according to figures familiarity.
However, other alternative investment strategies have drawn the rage of ASNESS, who he said “usually intentionally” was “deceived” by large institutional investors such as pension funds, promising high and stable returns.
He said the illiquidity and irregular valuation of the private equity portfolio allowed management to falsely claim that it was more stable than open market returns.
“There’s a lot of BS out there,” he said. “The ability to not report returns is a feature you pay, raising prices and lowering returns.”
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ASNESS said the reporting gap was convenient for investors who wanted to avoid marking down their portfolios during the open market slump, but did not mean that private equity firms were consistent with perceptions of high returns and low risk.
As private equity groups struggle to offload portfolio companies, institutional investors and donations have become increasingly reluctant to commit new capital to the fund.
Asness said higher liquidity and more frequent valuations of the so-called evergreen funds in which retail investors poured money into could shatter the lower risk of “illusions.”
“In this world, democratizing access to private assets means giving retailers worse deals than they already tougher deals they give institutional investors,” Asness said.
