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Aqr Case Report - Momentum Mutual Funds

Essay by   •  December 15, 2015  •  Case Study  •  2,901 Words (12 Pages)  •  4,522 Views

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[pic 1][pic 2]

[pic 3]

AQR Case Report

Group Members:

JIANG Qinglin    1155066406

WU Shuyang    1155066437

XIA Ri          1155065912

XU Yewei       1155067869

XU Yichen       1155066423

XU Ziya         1155066417


1. Compare the UMD factor to other specifications for momentum.

Figure 1 Average returns for momentum strategies

 

Decile Spread
portfolio returns

Quintile Spread
portfolio returns

UMD Spread
portfolio returns

Median Spread
portfolio returns

1920s

50.427

42.538

35.803

24.303

1930s

10.180

6.303

7.831

5.586

1940s

12.140

9.505

8.066

5.257

1950s

16.224

13.227

11.627

8.166

1960s

19.356

14.724

11.736

7.462

1970s

22.755

16.970

12.249

8.012

1980s

16.560

11.647

8.049

5.393

1990s

27.045

16.456

13.300

9.258

2000s

9.044

5.896

6.928

3.347

1927-1992

18.236

13.521

11.099

7.452

1993-2008

16.981

11.036

10.364

6.410

1927-2008

18.000

13.045

10.963

7.252

[pic 4]

Basically, the portfolios given in Exhibit 4 are formed and ranked based on the past returns (t-12 to t-2). Momentum strategy suggests that the fund managers should buy the portfolio/portfolios of high ranks, and short sell the portfolio/portfolios of low ranks in order to generate abnormal returns. But does the momentum actually exist? According to Exhibit 4, from 1927 to 2008, the average returns using different specifications for momentum (decile spread, quintile spread, UMD spread and median spread) all record positive outcome, which implied that the momentum did exist throughout the 82-year period. The specific average returns for every decade are shown in the above table. It can be observed from the chart that all these four factors are of similar trends. In particular, median spread portfolio returns are the lowest among four momentum factors with the least standard deviation of only 6.194, while the decile spread momentum has the highest standard deviation of 12.680, which means that trading on the median spread momentum strategy are less risky and meanwhile less profitable than trading on the decile spread momentum strategy.

Some investors took it for granted that momentum strategy would be less effective after it goes public, historical data has already told us that the concern is in fact unnecessary. Take UMD factor’s returns as an example, before the strategy was published in 1993, the average UMD spread portfolio return was 11.099%, only slightly higher than the counterpart of 10.364% after 1993. Therefore, publication of the momentum strategy does not affect its usefulness dramatically.

2. Details of AQR momentum strategy

2.1 How AQR’s retail momentum strategy differ from the traditional approaches

First, the major difference between AQR’s momentum strategy and the traditional momentum approaches is that AQR’s fund would be long-only, while the traditional approaches long and short. Second, the rebalancing period of AQR is different from that of the traditional approaches. Both in the UMD and the strategy followed Jegadeesh and Titman, all the stocks are re-ranked monthly. While the AQR’s strategy re-rank stocks quarterly. Third, traditional momentum approaches don’t specify the range of firms to be selected. For example, UMD ranks all listed stocks. However, AQR’s strategy computed its momentum indexes based on three categories: US stocks with large capitalization, the US stocks with small capitalization and the international stocks with large capitalization.

2.2 Expected return and risks of AQR’s strategy and traditional approaches

Table 1 Adjusting Returns for Risk

Strategy

Sharp's Measurement

Treynor's Measurement

Jensen's Measurement(α)

M2

T2

Information Ratio

UMD

0.5845

11.3885

0.0712

0.0442

11.3122[pic 5][pic 6]

0.5806[pic 7]

HML

0.6711

-1.7791

0.1484

0.0620

-1.8555

0.6999

AQR

0.5692

0.1248

0.0593

0.0410

0.0484

0.2209

Strategy

Average Return

Standard Deviation

Beta Coefficient

Non Systematic Risk

UMD

0.1092

0.1226

0.0063

0.0150

HML

0.1799

0.2121

-0.0800

0.0447

AQR

0.1904

0.2685

1.2248

0.0083

Note: The market average return, standard deviation and the risk free rate are respectively 7.64%, 20.62% and 3.76%.

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