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Hedge Fund AQR Use Game Theory To Exploit Market Inefficiencies

Date: Tuesday, July 26, 2011
Author: Alex Akesson, HedgeCo.Net

New York (HedgeCo.net) – $41 billion Connecticut hedge fund manager AQR Capital Management has launched a reinsurance group to develop investment strategies that have low correlation with traditional markets and hedge funds.

The group will be run by David G. Kabiller and game theorist Andrew J. Sterge, PhD.

“AQR’s view of reinsurance conforms to the firm’s general approach to new investment frontiers.” Kabiller said, “AQR undertakes extensive research, often in conjunction with major educational institutions, to analyze and calibrate discrete market inefficiencies that when aggregated, can be successfully exploited through dynamic exposure strategies.”

AQR intends to publish a white paper analyzing its findings.  Highlights include:

  • A 20-year historical performance review of reinsurance portfolios reveals little significant correlation to global equities, US fixed income, high yield credit, commodities and hedge funds.
  • Also looking back 20 years, a risk balanced portfolio of reinsurance spread across distinct territories and perils outperforms a “peak peril” portfolio that is concentrated in US hurricane, US earthquake, European windstorm and Japan earthquake.

The reinsurance strategy has a $250 million funding goal and will be capitalized by AQR and outside investors.

Alex Akesson
Editor for HedgeCo.net