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Why Quantitative Funds Are Risky

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Risks

A distinctive characteristic of quantitative (or quant) funds is that they can disappear during economic crises. A quant-based fund can give you groundbreaking profits when the relation between its various assets to their respective economic variables is identified and defined in the model. But a minor error in doing this can result in the model making bad decisions, thereby resulting in huge losses for the investor. In this article, we’ll take a look at the AQR Capital Management investment approach.

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AQR Capital Management

AQR Capital Management is an investment management firm that was founded in 1998 and has assets under management of around $43.7 billion as of July 2015. AQR Capital Management employs either absolute return strategies or total return strategies. Absolute return strategies seek to deliver positive returns regardless of market direction, a feature of a hedge fund. On the other hand, total return strategies seek to produce attractive risk-adjusted returns while allowing moderate correlations to traditional portfolios.

AQR Capital Management makes investment decisions using a series of global asset allocation, arbitrage, and security selection models. The fund uses proprietary trading and risk management systems. AQR believes that a systematic and disciplined process is essential for achieving long-term success in investment and risk management.

Holdings breakdown

AQR Capital Management has invested majorly in the information technology, finance, and healthcare sectors, which together constitute around 50% of the total portfolio. The fund’s top five holdings include Apple (AAPL), Microsoft (MSFT), Pfizer (PFE), Johnson and Johnson (JNJ), and Merck and Co. (MRK). Recently the fund increased its holdings in Apple (AAPL) and Microsoft (MSFT), since the fund believes the IT sector will perform well in the coming quarters. AAPL and MSFT form a major part of the PowerShares QQQ Trust, Series 1 (QQQ). Together AAPL and MSFT make up more than 20% of the ETF.

Overall, AQR’s investment strategy has provided excellent capital appreciation to its investors. However, it remains to be seen whether the fund’s model will continue to be viable.

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