A Market-Neutral Newcomer With Reasonable Fees

Patricia Oey: AQR Market Neutral is a relatively new fund which launched in late 2014. It is managed by AQR, which is known for its quantitative, or rules-based approach to investing.

Market-neutral is an alternative investment strategy that seeks to go long stocks that are expected to appreciate, and go short stocks that are expected to decline. The strategy is called market-neutral because it seeks to provide returns without exposure to equity markets. For example, if Wal-Mart appears to be expensive relative to Target, you could long Target because you expect it to go up, and short Wal-Mart because you expect it to go down. This type of trade allows the investor to capture the idiosyncratic movement in prices between the two companies that is not attributable to market movements.

For this fund, AQR employs dozens of metrics, like value measures such as price/earnings and price/book and quality measures such as earnings stability. All of the stocks from the MSCI World Index are put through these metrics to determine an overall score, and companies with high scores are held long, and companies with a low score are held short. The actual pairing between names to achieve a market-neutral portfolio is done with a portfolio optimizer.

This fund has a short track record, but it is worth keeping on your radar. We have a favorable view of the fund's parent, AQR, and fees of 1.28% for the institutional shares are reasonable. However, we note that there are other market-neutral funds that are cheaper than this fund.