Types of Investments
The Fund invests in a portfolio of futures contracts and futures-related instruments[1], utilizing more than 50 instruments across four major asset classes: commodities, currencies, fixed income and equities. The Fund can take long or short positions in any of these instruments, and thus seeks to benefit both if the price of the underlying instrument rises or falls.
Trading Strategies
The Fund establishes long or short positions based on a combination of several trading strategies described below.
Short-term Trend Strategy
This strategy aims to profit from a number of behavioral biases and market frictions that cause prices to under-react to either good or bad news. These biases present opportunities for the Fund to invest before prices move fully to reflect the change in fundamental value. The key reasons for this under-reaction are:
Anchoring Bias: Investors tend to anchor their views of fair price to the prior price level and adjust their views insufficiently to news. This phenomenon was first described in Kahneman and Tversky’s Nobel-Prize winning research.[2]
Disposition Effect: Investors tend to sell winners too quickly, while holding on to losers too long.
Price Insensitive Market Participants: Certain market participants, like central banks, may operate to dampen market volatility.
Long-term Trend Strategy
This strategy aims to profit from a number of behavioral biases that cause market participants to over-react. These biases cause an established trend to continue once it has begun. The key reasons for this over-reaction are:
Herding: After prices have trended for a while, some investors jump on the bandwagon, and this herding effect can prolong price trends.
Confirmation Bias: People tend to look for information that confirms what they already believe and look at recent price moves as representative of the future. This can lead investors to move money into investments that have recently made money, and conversely out of investments that have declined, causing trends to continue.
Risk Management: Some risk management schemes will sell in down markets and buy in up markets, causing trends to persist.
Over-extended Trend Strategy
This strategy aims to recognize when a trend is over-extended, which can increase the probability that the trend will reverse:
Trend Velocity: Trends that occur very quickly have a higher tendency to reverse.
Length and Magnitude of Trend: Trends that have persisted for long periods and that have moved prices substantially have a higher tendency to reverse.
Trading and Risk Control
The Fund employs a number of techniques to effectively trade its investments and to monitor risk:
Diversification: The Fund invests in over 50 futures contracts and futures-related instruments[1] in the equity, fixed-income, commodity and currency markets.
Drawdown Control: The Fund’s portfolio managers utilize a proprietary drawdown control system engineered to reduce the size of drawdowns (i.e. short-term declines) and maximize gains from favorable market conditions.
Trading Cost Management: The Fund employs proprietary portfolio optimization techniques to reduce the costs of trading. Trading is performed by a 24 hour global trading team with extensive expertise in trading many asset classes. The Fund employs proprietary electronic order placement algorithms to minimize the market impact of trades.
[1] Futures-related instruments include equity index futures, currency forwards, commodity futures, swaps on commodity futures, fixed income futures and bond futures, as well as exchange-traded funds or exchange traded notes that are linked to these contracts.
[2] See Tversky and Kahnemann (1974).
Managed Futures Fund: The use of derivatives, forward and futures contracts, and commodities exposes the Fund to additional risks including increased volatility, lack of liquidity, and possible losses greater than the Fund's initial investment as well as increased transaction costs. Concentration generally will lead to greater price volatility. This Fund enters into a short sale by selling a security it has borrowed. If the market price of a security increases after the Fund borrows the security, the Fund will suffer a potentially unlimited loss when it replaces the borrowed security at the higher price. Short sales also involve transaction and other costs that will reduce potential Fund gains and increase potential Fund losses.
The Fund is new and has less than a year of operating history
All AQR Funds. An investment in any of the AQR Funds involves risk, including loss of principal. The value of the Funds’ portfolio holdings may fluctuate in response to events specific to the companies in which the Fund invests, as well as economic, political or social events in the United States or abroad. Please refer to the prospectus for complete information regarding all risks associated with the Funds.
An investor considering the Funds should be able to tolerate potentially wide price fluctuations. The Funds are subject to high portfolio turnover risk as a result of frequent trading, and thus, will incur a higher level of brokerage fees and commissions, and cause a higher level of tax liability to shareholders in the Funds. The Funds may attempt to increase its income or total return through the use of securities lending, and they may be subject to the possibility of additional loss as a result of this investment technique.