A.J. D'Asaro: AQR Diversified Arbitrage fund (ADANX) gives access to three broad buckets of market-neutral strategies: convertible arbitrage, merger arbitrage, and what it calls "event-driven"--which is really a collection of six unrelated alternative strategies.
In 2014, two of these unrelated strategies, distressed credit and spin-offs, took directional energy-related positions. The fund hedged the market risk of these positions but not the sector risk. Taking sector-specific risk is uncommon for market-neutral funds, and it's one of the reasons why this fund was recently downgraded from a Silver to a Bronze rating.
However, we feel that the fund still has many strengths, including a diversified basket of strategies--which often diversify each other, although that wasn't the case in 2014. However, this fund shouldn't be completely disregarded because of the events of 2014. It still functions as a very effective diversifier to a fixed-income portfolio.