Morningstar Magazine - February/March 2018 - 12

Dispatches

AQR Dominates
But is it the Vanguard of
alternative investing?
IVORY TOWERS

John Rekenthaler

Alternative investments are different. Not just in
what they buy and how they perform (where,
of course, acting differently is the whole point), but
in how the industry operates. The rules that
govern other segments of the fund business often
don't apply to alternatives.
For example, alternative exchange-traded funds
have yet to make their mark. Whereas ETFs
have siphoned customers away from traditional
mutual funds-initially with domestic stocks,
then international stocks, and now taxable
bonds-they are an afterthought with alternatives
investors. While leveraged ETFs have sold
pretty well, they are not true alternative funds
in the sense of being uncorrelated with the major
markets. The real thing-categories such
as long-short credit or managed futures-hold
less than $4 billion in ETF assets.
In a related point, active investors dominate
in this space. ETFs, after all, rely on indexes, and
alternatives don't easily lend themselves to
indexing. They are strategies. We can measure
the U.S. stock market, then create an index to
replicate that measurement. We can't do the same
with a market-neutral strategy. To be sure, we
can build an ETF by devising a representative
strategy, then call our invention an "index." But,
clearly, such a construction is less natural
than a marketplace index, and investors have
responded accordingly.
Because index funds pose little competitive threat,
expense ratios for the leading alternative funds
are far higher than elsewhere in the industry.
These days, the vast majority of conventional fund
sales go into funds that have expense ratios
of less than 0.6%-usually much less. With

12

Morningstar February/March 2018

alternatives, on the other hand, a 1% expense ratio
is considered low-cost. Most of the larger funds
have expense ratios approaching 1.5%, which
would doom them were they not alternatives.

outliers; it's not as if every fund company
besides AQR has being losing alternatives assets.
Rest assured, though, AQR has comfortably led
the way.)

One AQR to Rule Them

E XHI B I T 2 shows how AQR has succeeded.
It depicts AQR's four best-selling funds for the year
through October 2017. They have attracted $4
billion in new assets, counting all share classes.
I have selected the highest-selling share class for
each fund. (Portraying the results of multiple
share classes of the same fund is messy and adds
no useful information in this case.) Each fund's
relative total returns, as measured by its trailing
three-year ranking within its Morningstar Category,
is shown in the first bar. Costs relative to each
fund's broad Morningstar Fee Level Group
are shown in the second.

Given all these differences, it's not surprising that,
for alternatives, industry leadership is
upside down. The giants are absent. Among them,
Vanguard, BlackRock, Fidelity, Capital Research,
and T. Rowe Price run a grand total of $7
billion in alternative mutual funds. In contrast,
the management firm AQR controls $29 billion.
It is, one might say, the Vanguard of the
alternatives business.
EX HIBIT 1 compares the net monthly sales since
November 2012 of AQR against those of
alternative funds from 164 other mutual fund
managers combined. AQR took a while to
gather momentum-of course, so did Vanguard
back in its day-but starting about three
years ago, AQR moved into first place. Since then,
it has steadily gathered new assets while its
rivals have mostly suffered net redemptions. (As
is the nature of aggregations, the bars representing AQR's competitors hide the occasional

For both bars, higher is better. The best-performing
fund would have a performance bar that reaches
the top percentile, and the cheapest fund
would have an expenses bar at the top percentile.
Blue-Ribbon Returns
AQR won the old-fashioned way: Its funds beat

everybody else's. AQR Long-Short Equity

EXHIBIT 1

AQR Takes First Place The industry leader has gathered assets as competitors have
suffered net redemptions.
164 Other Managers

AQR Funds

Monthly Estimated Net Flows
$8
Bil
11/2012-10/2017

6
4
2
0
-2
-4
-6

11/2012

11/2013

Source: Morningstar. Data as of 10/31/2017.

11/2014

11/2015

11/2016



Table of Contents for the Digital Edition of Morningstar Magazine - February/March 2018

Contents
Morningstar Magazine - February/March 2018 - Cover1
Morningstar Magazine - February/March 2018 - Cover2
Morningstar Magazine - February/March 2018 - 1
Morningstar Magazine - February/March 2018 - 2
Morningstar Magazine - February/March 2018 - Contents
Morningstar Magazine - February/March 2018 - 4
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