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FINA 411
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AQR was established in 1998 in Connecticut by its founder Cliff Assess and partners with whom he previously worked at Goldman Sachs AQR was the first retail fund to focus on momentum Today AQR manages assets for large institutional investors It has over 300 employees and 19 billion dollars in assets The momentum strategy entails that stocks that performed well in the past will continue to perform well and that stocks that performed poorly in the past will continue to perform poorly It predicts expected returns of stocks only with historical information so it is a violation of weak form market efficiency It consists of creating a portfolio that buys winner stocks and sells loser stocks Many see momentum as a strategy born from behavioural theories Some argue that momentum is caused by an overreaction to news an effect caused by investors who expect good news to be followed by more good news Other people think the opposite that momentum is a result of underreaction to news In this scenario if good news comes out the stock price increases less that it deserves at first and then slowly catches up to its appropriate price Some people simply explain momentum as compensation for bearing undiversifiable risk and exposing to the possibility of great losses AQR invested a large portion of its assets in hedge fund strategies AQR started to be attracted by the potential it saw in mutual funds and decided to enter the mutual fund market Mutual funds differ from hedge funds in many ways Firstly anyone can invest in mutual funds whereas only institutions and networth investor could invest in hedge funds Another important difference is that hedge funds investors could only cash out at the end of a quarter but openend mutual fund investors could cash out at any time Openended mutual funds were required to calculate net asset value NAV every day and to be ready at any time to purchase andor sell their shares at that NAV Furthermore contrarily to hedge funds mutual funds were limited by the law in their use of short positions and leverage Mutual funds could not sell loser stocks short to reap the full benefits of momentum Regulations prohibited mutual funds to charge fees and required them to adopt prudent investment strategies These regula
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