AQR Blames Crowding For Losses, Says ‘Severe’ Rumors False

Aug 13 2007 | 12:11pm ET

It seems saying sorry isn’t contagious.

As more and more hedge funds are forced to send mea culpa letters to investors assuring them that it only seems as though the sky is falling, few, if any, are taking the route of Sowood Capital Advisors’ Jeffrey Larson, who told investors that he was “very sorry” that he lost upwards of 60% of their investments. Most, like Friday’s missive from AQR Capital Management, accept a modest amount of blame, peppered with a heaping pinch of excuses.

“Many of you have heard rumors concerning us over the last few days,” founding principal Clifford Asness wrote. “If the rumors are that we’ve had better weeks, then they are accurate. If the rumors are that we are in some pain over the recent widespread quant stock selection woes, then they are accurate. If the rumors are more severe than that, then they are simply false.”

Of course, severity is in the eye of the beholder: Bloomberg News reports that investors in one of the Greenwich, Conn.-based firm’s Global Stock Selection funds are saying it is down 21% year-to-date. But AQR, which manages about $10 billion in hedge funds, also has a bright side—one that it continually pointed to in its letter—as its asset allocation fund is up 3.5% in August.

AQR said it is in no danger of shutting down. “Our business is stable and healthy,” Asness wrote.

Still, he acknowledged that its quantitative stock selection strategy has proven “shockingly bad,” and that the firm “underestimated the magnitude and the speed with which danger could strike.” But he blamed crowding in the space for the declines, saying everyone suffers “when too many try to get out the same door.”

“This is decidedly not a regular drawdown,” Asness wrote. “It’s a deleveraging of historical proportions.”

AQR LETTER TO INVESTORS


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