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Fund Manager Q&A

Making the Trend Your Friend

AQR Capital's Cliff Asness describes the process driving the Managed Futures Strategy Fund, its strategy versus other absolute return funds, and the timing of its recent launch.

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Cliff Asness co-founded AQR Capital Management. As portfolio manager of the AQR Managed Futures Strategy Fund (AQMIX), he tells us what this fund is all about, why it's ranked at the top for "absolute return" funds, and how it offers diversification.

1. At its core, what does this fund do and how does it do it?
The fund attempts to identify and profit from trends in many global markets across four major asset classes: commodities, currencies, equities, and fixed income. At a basic level, managed futures is a strategy that trades futures contracts long and short across a very broad range of instruments. One of my colleagues likes to use the visual of Eddie Murphy screaming in the futures pit in the movie "Trading Places" to describe the strategy, even though that's a fairly misleading visual of how futures are traded in today's electronic marketplace, and we don't have access to Clarence Beeks.

Managed futures is a strategy that has been around pretty much as long as futures markets have been around. Historically, it's been a strategy pursued primarily by futures traders and in the last 10-20 years by hedge funds. The trading strategy employed by most managed futures funds boils down to some type of trend-following strategy, which is also known as momentum investing. Simply put, momentum investing is buying securities that are improving and selling securities that are deteriorating. There has been a mountain of research since the early 1990s showing that momentum "works"--meaning that price momentum has significant predictive power. Beyond this empirical evidence, there has also been considerable behavioral finance research to explain why trends tend to persist. I'll mention three key reasons: does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.