Its mandate was simple: “They just said: ‘Go and see if this academic stuff works’. “So for the first few months we were walking around, being door-to-door quants, asking: ‘Does somebody need a quant to do something?’” Soon they were asked to develop a model detecting value and momentum in the stock markets of countries around the world. It worked. The team kept implementing ideas, and after posting good numbers, prodded GSAM to seed an aggressive market-neutral hedge fund with partners’ capital. It was a “key lucky break,” Asness wrote in his chapter in the book, How I Became a Quant. The fund shot the lights out. Its returns beat backtesting results, and Asness attributes this to the success of the models and complimentary markets. (If you outperform your backtests, it’s “a key sign you’re getting at least somewhat lucky,” he writes.)
After successive years of strong performance, and experience running US$6 billion in long-only assets and about US$1 billion in the market neutral portfolio, the temptation for Asness and some of his team to launch their own venture – based on their applied quantitative research – in the hedge fund heyday of the late 1990s was too much. He founded AQR with John Liew, Bob Krail and David Kabiller. Since hedge funds in those days could shrug demands to provide a three-year track record, the firm soon raised US$1 billion. The wind was at AQR’s back. The partners built models for their absolute return fund and got to work. The momentum of their GSAM success carried them straight into the dotcom bubble. The firm’s early life was tough.
Its performance was poor compared to the unrealistically valued technology sector of the market, and AQRs assets under management fell to about US$400 million at the depth of its dotcom blues. It was one of the few lonely outsiders not caught up in the growth story. “The tech bubble had survival risk, and God-you’rean- idiot risk,” Asness says. If all his clients joined the mad herd, “I would have been the guy who got the tech bubble wrong and never came back. “When you have put all your money into your new business – you have nothing else – and you’re down in your first year, you have survival risk there. And if it doesn’t work your option is to go back to Goldman Sachs or the equivalent with your tail between your legs.” Even though the flagship fund’s performance roared back into positive territory when the bubble ended, the experience reinforced the manager’s original aim to diversify its business.