Aqr Momentum Fund (A) Case Case Study Solution
Purpose of AQR’s momentum indexes
The core reason for the indexes is to demonstrate that the investment would be an attractive option for the investors due to the fact that they would be able to increase the sales. Though, the publishing indexes have some drawbacks, since the investors have insufficient knowledge as compared to the traditional momentum funds investors.
In addition to this, AQR should publish indexes before launching the funds, which would result in more sales for those retailers who show their willingness for investing in the funds, and are seek to increase their understanding and knowledge before making any investment in funds.
Differences between 1-factor alpha and 4-factor alpha
Referring to the exhibit 3 provided in the case; the difference between the 1-factor alpha and 4-factor alphas has been witnessed with a significant consideration that under the 1-factor alpha (CAPM Model), the momentum returns under the one-factor model explain that the investors should be compensated for two things, including risk and time value. But, the one-factor alpha does not take the momentum under consideration. Whereas, the momentum returns under the four-factor alpha model show better approximate or nearly equal results related to the total accruals, financial distress, net stock issues, and asset growth.
The analyzation of the momentum returns shows that the one-factor alpha has performed better as compared to the four factor-alpha for long and long/short position. Where as the four-factor alpha has performed better as compared to one factor-alpha for the short position only.
UMD will continue to have positive 1-factor (CAPM) alpha in the future
Referring to the Exhibit 4 provided in the case study; it can be seen that the UMD of momentum strategy had been generating positive returns with the period from 1927 to 2008 which can be used as a basis of predicting that it would have returns greater than 0. The positive returns over the period of time indicate that the momentum strategy would successfully generate higher profit returns in the forthcoming years.
Ways of managing momentum funds
AQR has an ability to manage the momentum funds in an efficient way momentum funds by analyzing the performance of the stocks on a regular basis. By doing so, the company would allow the fund managers to evaluate the stock that would mots likely generate higher returns. It would allow helping the manager to critically identify the stocks in the portfolio that move towards loser stocks. This, in return, would help the company to invest in those stocks, which have massive chances to generate higher returns and move up in ranks in the near future, and disinvest from those stocks that are losing their ranks in the market. This strategy is appropriate and suitable to bring the desirable returns to the mutual fund investors. The management of momentum funds requires the fund managers to pay close attention to risk and cost for the purpose of capitalizing on the opportunities.
Recommendation
If I suppose myself to be in the shoes of Cliff Asnessm, then I would opt to introduce only one fund in the market, after which I’d move on to introducing other funds after evaluation of the performance and the returns generated from the first fund. With AQR launching momentum effect; the effect would be presented in a successful manner to the wider community of the investors. Since the wider community of investors has not been aware of it, and also lacks the knowledge of its usage technique, because of the unavailability.So, presenting the momentum effect to the wider investor community would be emerging as a widely accepted investment strategy. This would gather greater benefits for both AQR and investors in a way that investors would be able to enhance and improve the diversification of their portfolio & improve their expected risk-adjusted return.
In consideration to strengthening the trust of investors and to attract the potential investors in the future; the company should develop efficient strategies to maximize the returns on portfolio while lowering the tracking error. This can be done by finding the right balance between tracking errors and returns in the mutual funds. Reducing tracking error would help the company in meeting its benchmark index in the future ahead…………
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