AQR in Wonderland: Down the Rabbit Hole of 'Deactivating Active Share' (and Back Out Again?)
24 Pages Posted: 1 Jul 2015
Date Written: June 30, 2015
The April 2015 paper “Deactivating Active Share”, released by AQR Capital Management, aims to debunk the claim that Active Share (a measure of active management) predicts investment performance. The claim of the AQR paper is that “neither theory nor data justify the expectation that Active Share might help investors improve their returns,” arguing that previous results are “entirely driven by the strong correlation between Active Share and the benchmark type.”
This paper’s first and main aim is to establish that the AQR paper should not be interpreted using typical academic standards. Instead, our conjecture is that this AQR paper falls into a wonderfully creative but altogether different genre, which we label the Wonderland Genre, as its main characteristic seems to be “Sentence First, Verdict Later.” For example, the results in the AQR-WP cannot be taken at face value, as the information that is not shared reverses their main conclusion.
Secondarily, we consider the plausible claim that benchmark styles matter and find that controlling for the main benchmark style, the predictability of Active Share is robust. While Active Share is only one tool among many to analyze investment funds and needs to be carefully interpreted for each fund individually, Active Share may indeed plausibly help investors improve their returns.
Thirdly and finally, we impolitely consider why AQR may not be a big fan of Active Share by taking a look at the AQR mutual funds offered to retail investors. We find that these tend to have relatively low Active Shares, have shown little outperformance to date (with performance data ending in 2014) and thus seem fairly expensive given the amount of differentiation they offer.
Keywords: Active Share, mutual fund performance, benchmark
JEL Classification: G11, G14
Suggested Citation: Suggested Citation