Sometime in 2008, AQR Capital Management was considering the launch of a new hedge fund strategy. The planned AQR's DELTA Strategy allows the exposure of investors to nine important hedge fund strategies. This strategy would provide AQR the opportunity to implement its structure through an effective investment system. The strategy would likewise charge a fee of 11% (1% management fees plus 10% of performance over a cash hurdle) or 2% management fee. In comparison to other fee structures of other companies in the same industry, this is considered relatively low.
Daniel B. Bergstresser, Lauren H. Cohen, Randolph B. Cohen, Christopher J. Malloy
Harvard Business Review (212038-PDF-ENG)
October 27, 2011
Case questions answered:
- How and why AQR’s DELTA Strategy was developed?
- What are the most appealing features of DELTA?
- DELTA vs. Alternative Hedge Fund replication products.
- What drove the Hedge Fund boom during this period?
- How well do hedge fund replications products actually track the HFRI in practice?
- Is Delta alpha or beta?
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Case answers for AQR's DELTA Strategy
Executive Summary – AQR’s DELTA Strategy
The first part of the paper deals with the introduction and the development of AQR’s DELTA Strategy, followed by the advantages of using this strategy.
The paper also identifies the hedge funds strategy for dealing with the risk associated with asset portfolio management.
The next part of the paper deals with the replication strategies, followed by identifying the main reasons for increased use of hedge funds and the features of the delta strategy.
Further, the paper judges the ability of the hedge fund to track HFRI. The paper concludes that delta is different from both alpha and beta.
How and why AQR’s DELTA Strategy was developed?
AQR’s DELTA Strategy is found attractive in two ways. Firstly, the Delta strategy is developed through a well-defined investment process to deliver a diversified collection of hedge fund strategies.
Secondly, it allows the traders to establish a neutral position with both buying and selling options according to the neutral ratio. A calendar spread is the most common tool to implement buying and selling that involves constructing a neutral position with the help of options having dissimilar expiration dates.
The word ‘Delta’ has been developed as an acronym for its features that are Dynamic, Economically intuitive, Liquid, Transparent, and Alternative. The portfolio was designed in such a way that it was not related to the stock market.
There are mainly two benefits that can be derived by adopting the delta strategy. Firstly, it allows the traders to safeguard themselves from the fluctuations in prices of the portfolio. Secondly, the delta strategy protects the profits in the short-term while protecting the holdings for the long term.
What are the most appealing features of DELTA?
The most appealing characteristic of AQR’s DELTA Strategy are mentioned below:
- The DELTA strategy is the most dynamic in nature as it entails a mixture of debt and equity.
- It indicates the probability of success of the portfolio at the time of expiration.
- It reduces the directional risk concerning the price changes by offsetting short and long positions simultaneously.
DELTA vs. Alternative Hedge Fund replication products
The replicating portfolio of AQR’s DELTA Strategy should…