ORTFOLIO
ESIGN:
EYOND
HE
RADITIONAL
PRIVATE AND CONFIDENTIAL
Premium Wealth Management Conference, April 2012
For Investment Professional Use Only
The information set forth herein has been obtained or derived from sources believed by AQR Capital Management, LLC (“AQR”) to be reliable. However, AQR does not make any representation or warranty, express or implied, as to the information’s accuracy or completeness, nor does AQR recommend that the attached information serve as the basis of any investment decision. This document has been provided to you in response to an unsolicited specific request and does not constitute an offer or solicitation of an offer, or any advice or recommendation, to purchase any securities or other financial instruments, and may not be construed as such. This document is intended exclusively for the use of the person to whom it has been delivered by AQR Capital Management, LLC, and it is not to be reproduced or redistributed to any other person. This document is subject to further review and revision.
DETAILED-GRP PM VERSION-6-v6
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Global Equity
$10.3 B
Total Assets $50.6 B *
US Equity
$2.5 B
Other Long-Only
Equity
$1.1 B
International Equity
$9.2 B
Alternative
Strategies
$27.5 B
Risk Parity
$12.8 B
Alternative Investment Strategies $27.5 B*
Multi-Strategy
$4.4 B
Global Macro
$2.2 B
Managed Futures
$2.4 B
Event Driven
$3.2 B
Equity-Related
$2.4 B
* Approximate as of 2/29/12, includes assets managed by CNH Partners, an affiliate of AQR.
1


Traditional Approach
• Start with a limited set of assets
• Allocate capital to them
• Find managers for each asset class and allocate capital to them
• Investment objective: allocating capital to assets with high expected return subject to a risk limitation, try to add some alpha

Beyond the Traditional Approach
• Seek out as many market exposures as possible
• Allocate risk, not necessarily capital, to them
• Use active management only where managers have unique skill
• Investment objective: building the most efficient portfolio
 Today’s Agenda
• Look at ways of moving beyond the traditional approach, including a focus on “hedge fund beta”
2

Skill
Dynamic
Exposures
Market Exposures
Examples
• Skill-Based Active Strategies (“Alpha”)
• Exposure Timing Strategies
• Market-Independent
• Carry Trades
• Pure Value
• Pure Momentum
• Systematic Arbitrage Strategies
• Hedge Fund Beta
• MSCI World
• Barclays Aggregate
• Emerging Equities
• Commodities
3

Objectives of Market Exposures

Include a broad range of different asset classes around the globe; goal should be to maximize diversification – the only free lunch in finance

Provide long-term positive expected returns as compensation for holding risky assets; expected returns for each asset are commensurate with their expected risk
Portfolio Theory
Diversify Broadly
Implementation
Set a broad investable universe including as many asset classes as possible
Diversify Risk Risk budgeting to target how much portfolio risk should come from each investment
Maximize Efficiency Find the most efficient portfolio and scale it to include the desired level of risk
Diversify Through Time Maintain risk level and diversified exposure in all market environments
Diversification does not eliminate the risk of experiencing investment losses.
4

Equity Exposure
Developed
• Australia
• Spain
• Japan
• France
• Netherlands
• Hong Kong
• Switzerland
• United Kingdom
• Germany • United States
• Italy
Mid Cap
• United States
Small Cap
• United States
Emerging
• China • South Africa
• India • Singapore
• South Korea • Taiwan
Interest Rate Exposure
Developed
• Australia
• Europe
• United Kingdom
• Japan
• United States
Emerging
• Czech Republic
• Hong Kong
• Hungary
• South Korea
• Poland
• Singapore
• South Africa
Inflation Exposure
Inflation Linked Bonds
• France
• United Kingdom
• United States
Commodities
• Corn
• Wheat
• Copper
• Lead
• Nickel
• Zinc
• Gold
• Silver
• Cocoa
• Coffee
• Cotton
• Soybeans
• Aluminum
• Crude Oil
• Brent Oil
• Gas Oil
• Heating Oil
• Natural Gas
• Live Cattle
• Feeder Cattle
• Lean Hogs
• Sugar
Credit/Default Exposure
Credit Spreads
• United States – Investment Grade
• United States – High Yield
Emerging Currency Forwards
• Brazil
• Israel
• Mexico
• Turkey
• South Korea
• South Africa
• Singapore
• Taiwan
Comm Mort-backed Spreads
• United States
The above exposures are for illustrative purposes only and are subject to change at anytime. Please read important risk disclosures in the Appendix.
5


Investors tend to view portfolio diversification in terms of asset allocation
• A portfolio with a balanced asset distribution is perceived as diversified

Below we illustrate the significant equity risk in a traditional capital allocation portfolio

In risk terms, this portfolio is actually very concentrated as equity risk dominates the portfolio due to the greater volatility of stocks versus other asset classes
Capital Allocation
Risk Allocation
Risk Allocation (New Approach)
Equities
Private Equity
Bonds
Real Estate
Hedge Fund of Funds
60% Equity Capital 89% Equity Risk
The above risk exposures are based on AQR volatility and correlation estimates and are for illustrative purposes only. Please read important risk disclosures in the Appendix.
6

Maximize Efficiency

Find most efficient portfolio (greatest return per unit of risk)

Lever (or de-lever) that portfolio to desired risk level
Most Efficient
Portfolio
Most Efficient
Portfolio
Leveraged to
60/40 Risk Level
Benefit of Risk Diversification and Efficient Portfolio
Construction
60%/40%
Stocks/Bonds
100%
Emerging
Equities
100%
Stocks
100%
Commodities
Benefit of Broad and
Global Diversification
100%
TIPS
100%
Bonds
Risk-Free
Rate
Volatility
Leverage has risks, so does concentration: trade off a risk you don't get paid enough to bear for one you do!
The above chart is for illustrative purposes only and does not represent the performance of an actual portfolio. Please read important risk disclosures in the Appendix.
7

Skill
Dynamic
Exposures
Market Exposures
Example
• Hedge Fund Beta
8

Over time, an increasing proportion of returns can be explained and attributed to systematic risk factors:
Time
ALPHA
ALPHA
ALPHA
Prior to Cap-Weighted
Equity Indices
– Returns viewed as alpha
ALPHA
EQUITY RISK
PREMIUM
Equity Risk Premium introduced
Examples:
– S&P 500 Index
– MSCI World
OTHER MARKET
RISK PREMIA
EQUITY RISK
PREMIUM
Other Market Risk
Premia introduced
Examples:
– Commodity Indices
– Real Estate
HEDGE FUND RISK
PREMIA
OTHER MARKET
RISK PREMIA
EQUITY RISK
PREMIUM
Hedge Fund Risk
Premia introduced
Examples:
– Merger Arbitrage
– Convertible Arbitrage

Objectives of Dynamic Exposures (“Hedge Fund Betas”)

Capture the fundamental insights of a range of active management strategies – along with a meaningful portion of the risk premium those strategies earn – using a dynamic but clearlydefined investment process

Avoid the drawbacks of high fees, long lock-ups, low transparency and high leverage associated with hedge funds, which have historically been the predominant source of dynamic exposures for institutional investors
D ynamic
E conomically intuitive
L iquid
T ransparent
A lternative
10


Hedge funds have high and increasing levels of passive market exposure
Popular Hedge Fund Indices’ Correlations with MSCI World
(Rolling quarterly hedge fund index returns)
Since
Inception
(’94-’10)
10Yrs
(‘01-’10)
7Yrs
(‘04-’10)
5Yrs
(‘06-’10)
3Yrs
(‘08-’10)
Dow Jones Credit Suisse
Hedge Fund Index
0.65
0.84
0.90
0.89
0.90
HFRI Hedge Fund Index 0.82
0.93
0.94
0.94
0.95
Source: DataStream, Dow Jones Credit Suisse Hedge Fund Index (data from January 1994 – December 2010) and HFRI Hedge Fund Index (data from January 1990 – December 2010).
Past performance is not an indication of future results.
11

12

Event
Driven
Fixed Income
Relative Value
Convertible
Arbitrage
Managed
Futures
Equity
Market
Neutral
Global
Macro
Dedicated
Short Bias
Emerging
Markets
Long/Short
Equity
Please read important risk disclosures in the Appendix.
13


Relative Value Strategies
• Identify mis-priced assets (some priced too high, others too low)
• Seek positions that will profit when appropriate prices are achieved; structure to help minimize market exposure
• Example: equity market-neutral

Arbitrage Strategies
• A special case of relative value – shorter horizon / clearer mis-pricing
• Often liquidity providing
• Example: merger arbitrage

Timing Strategies
• Short-term views on the direction of an asset
• Harder to hedge, but a valuable skill if one can identify trends or other predictors
• Example: managed futures
14


Liquidity Needs
• Companies need financing on good terms (convertible arbitrage)
• Supply and demand for capital not always balanced (carry trades)

Risk Aversion
• Investors don’t want to wait for mergers to close (merger arbitrage)
• General aversion to short stocks (short bias)

Suboptimal Investor Behavior
• Slow reaction to news, tendency to sell winners (managed futures)
• Avoid investments with bad news / poor results (value)

Manager Expertise
• Some people may be able to predict the future better than others
15


Portfolio construction should lean towards equal risk weighting

Investors should make adjustments to reflect the leverage, liquidity and expected efficacy of each strategy – beware of the left tail!

Rebalancing is a “contrarian” approach that can help avoid overcrowded strategies
Strategic Risk Allocation For A Multi-Strategy Dynamic Return Source*
13%
7% 11%
13%
16%
11%
10%
7%
12%
Convertible Arbitrage
Event Driven
Fixed Income Relative Value
Dedicated Short Bias
Equity Mkt Neutral
Equity Long/Short
Global Macro
Managed Futures
Emerging Markets
* Example above is based on AQR estimates and is for illustrative purposes only. Please read important risk disclosures in the Appendix.
17

Single asset class, generally cap-weighted
Multiple strategies, each with a unique weighting system; cap-weighting does not apply
Buy-and-hold strategy, long-only
Infrequent trading, holdings change slowly
Dynamic strategies trading a range of asset classes and instruments, long and short; infrastructure is critical
Frequent adjustment to positions as market conditions change; must manage t-costs
18

Hypothetical Gross Returns of a Hedge Fund Beta Portfolio and Hedge Fund Indexes – 1994 through 2011
$800
$700
$600
Hypothetical Hedge Fund Risk Premia Portfolio
DJ CS Hedge Fund Index
HFRI Fund of Funds Composite Index
MSCI World Index
$500
$400
$300
$200
$100
$-
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Hypothetical Hedge Fund Risk Premia Portfolio
Dow Jones Credit Suisse Hedge Fund Index
HFRI Fund of Funds Composite Index
MSCI World Index
Gross
Return
(pa)
11.9%
9.4%
5.9%
6.5%
Volatility
(pa)
5.9%
7.6%
6.1%
6.4%
Sharpe
Ratio
1.5
0.8
0.4
0.5
Hedge
Correlations
MSCI
Fund
Risk
World
Index
Premia
Portfolio
(01/94 -
03/11)
MSCI
World
Index
(last 5 years)
1.0
0.5
0.5
0.2
0.2
0.6
0.6
1.0
0.2
0.8
0.8
1.0
* The Hypothetical Hedge Fund Risk Premia Portfolio is based on AQR proprietary datasets and run to an annualised volatility target of 6% and employs, on average, leverage of 2 per side (i.e.. for $100 investment, the portfolio will purchase roughly $225 securities long and sell short $175 worth of securities). The underlying 9 hedge fund strategies (noted on slide 13 ) are roughly equal risk-weighted, and the backtest accounts for transaction costs by incorporating estimates of both commissions and potential market impact. Returns, volatilities and correlations are annualised figures based on monthly return data and are all denominated in USD.
Please see important disclosures relating to hypothetical results at the end of this document.

Examples
• Skill-Based Active Strategies (“Alpha”)
• Exposure Timing Strategies
• Market-Independent Skill
Dynamic
Exposures
Market Exposures
20

Objectives of Skill Exposures

Deliver exposure to investment managers’ ability to either time different markets or select specific securities

Provide unique, diversifying return streams; may require longer lock-up periods and use of leverage
Capacity Focus on large-scale sources of manager skill
Correlation
Diversification
Contrarian
Liquidity
Active strategies should have low correlation to traditional markets
Find managers with different expertise and strategies that are differentiated
Acting against trends and conventional wisdom is a form of skill
Get paid for your long-term horizon by providing liquidity when it is in short supply
21


Portfolio construction focuses on allocating risk to three return sources:
• Skill
•
• Dynamic Return
Market Return

Risk parity offers an alternative to over-reliance on equities for market return

Hedge fund beta provides a new approach to dynamic strategies that had previously been offered only through active managers / hedge funds

Add as much alpha as you can find, net of fees and factors
22

AQR Capital Management, LLC (“AQR”) is exempt from the requirement to hold an Australian Financial Services License under the Corporations Act 2001 (Cth). AQR is regulated by the Securities and Exchange Commission ("SEC") under United States of America laws, which differ from Australian laws. Please note that this document has been prepared in accordance with SEC requirements and not Australian laws.
The information set forth herein has been provided to you as secondary information and should not be the primary source for any investment or allocation decision. Please obtain the advice of your fiduciary prior to any investment. The information set forth herein has been obtained or derived from sources believed by AQR to be reliable.
However, AQR does not make any representation or warranty, express or implied, as to the information’s accuracy or completeness, nor does AQR recommend that the attached information serve as the basis of any investment decision. This document has been provided to you solely for information purposes and does not constitute an offer or solicitation of an offer, or any advice or recommendation, to purchase any securities or other financial instruments, and may not be construed as such. This document is intended exclusively for the use of the person to whom it has been delivered by AQR, and it is not to be reproduced or redistributed to any other person. The information contained herein does not constitute legal, tax or accounting advice or investment advice and is solely based on the opinion of AQR of which no expectation of compensation will be derived. The recipient should conduct his or her own analysis and consult with professional advisors prior to making any investment decisions. Any investment made will be in the sole discretion of the reader.
Past performance is not an indication of future performance. Diversification does not eliminate the risk of experiencing investment losses.
Gross performance results do not reflect the deduction of investment advisory fees, which would reduce an investor’s actual return. For example, assume that $1 million is invested in an account with the Firm, and this account achieves a 10% compounded annualized return, gross of fees, for five years. At the end of five years that account would grow to $1,610,510 before the deduction of management fees. Assuming management fees of 1.00% per year are deducted monthly from the account, the value of the account at the end of five years would be $1,532,886 and the annualized rate of return would be 8.92%. For a ten-year period, the ending dollar values before and after fees would be
$2,593,742 and $2,349,739, respectively. AQR’s asset based fees may range up to 2.85% of assets under management, and are generally billed monthly or quarterly at the commencement of the calendar month or quarter during which AQR will perform the services to which the fees relate. Performance fees are generally equal to 20% of net realized and unrealized profits each year, after restoration of any losses carried forward from prior years. In addition, AQR funds incur expenses (including start-up, legal, accounting, audit, administrative and regulatory expenses) and may have redemption or withdrawal charges up to 2% based on gross redemption or withdrawal proceeds.
Please refer to AQR’s ADV Part 2A for more information on fees.
Hypothetical performance results (e.g., quantitative backtests) have many inherent limitations, some of which, but not all, are described herein. No representation is being made that any fund or account will or is likely to achieve profits or losses similar to those shown herein. In fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently realized by any particular trading program. One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of hindsight. In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk in actual trading. For example, the ability to withstand losses or adhere to a particular trading program in spite of trading losses are material points which can adversely affect actual trading results. The hypothetical performance results contained herein represent the application of the quantitative models as currently in effect on the date first written above and there can be no assurance that the models will remain the same in the future or that an application of the current models in the future will produce similar results because the relevant market and economic conditions that prevailed during the hypothetical performance period will not necessarily recur.
There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results, all of which can adversely affect actual trading results. Discounting factors may be applied to reduce suspected anomalies.
There is a risk of substantial loss associated with trading commodities, futures, options, derivatives and other financial instruments. Before trading, investors should carefully consider their financial position and risk tolerance to determine if the proposed trading style is appropriate. Investors should realize that when trading futures, commodities, options, derivatives and other financial instruments one could lose the full balance of their account. It is also possible to lose more than the initial deposit when trading derivatives or using leverage. All funds committed to such a trading strategy should be purely risk capital.
Convertible bond securities may be considered illiquid securities, which cannot be sold or disposed of in the ordinary course of business at approximately the prices at which they are valued. Difficulty in selling securities may also result in a loss or may be costly to the portfolio.
23