AQR Capital Management is riding a historic high in 23 years of history even as Wall Street gets ready for a tighter monetary policy. AQR $1 billion Absolute Return fund Posted 10% gain in 5 days last week.
After getting lashed for years of underperformance, the hedge fund manager and Co-founder Cliff Asness feel that it is too early to gloat or declare premature victory. He said he would feel vindicated when his clients are well ahead.
As per Bloomberg news, despite an excellent start to 2022 with an 8% gain, the Equity Market Neutral Fund is still down by 14% in five years. The Firm manages about $124 billion overall assets compared to the $ 220 billion funds in 2018.
The rampant inflation, rising yields, and economic upturns have boosted the strategy of buying cheap stocks and dumping the expensive ones, which AQR is famous for. AQR has used a value surge strategy, among others, to pick up stocks that have compensated for declines in quality and momentum.
Equity values have been notorious as their rebounds have been short-lived in the post-pandemic era, and Tuesday, it retook a hiatus as yield in bonds declined. Asness sees a market that is aligning finally with his consistent view that trade is rewarding for those who remain invested in the long term.
According to Asness, the fundamentals, price momentum are right, and valuation spreads are at record after discounting the previous six months talked about the stretched valuations when global stocks traded at a 55% discount on their PE mu in early December. It is still at 51% compared to an average of 25% going back to 1980. According to him, the metric was never good historically. It discounted the spread, which was always wide, with values recovering only toward the end of 2020 after the Covid vaccine fired up the risk appetite.
The bonds have been behaving as catalysts. The last 11 months saw the treasury’s worst sell-off as Fed Reserve is set to hike interest rates to fight inflation. The share values, which are typically cyclic, have outperformed in that period.
Though AQR in the past has suggested that there was no credible link between price values in the historical data, Asness now agrees that factor may be sensitive to swings in bond in the short run. However, bonds will have to rally significantly to make an impact, considering the tight relationship seen in recent years.
Asness, for the moment, is spending little time defending the values in the era of zero rates and big tech and harbors hopes of multiple years of vindication such as the one that followed the peak of Dotcoms.
