AQR hedging its bets with big mutual fund plan

By Joseph A. Giannone

NEW YORK (Reuters) - AQR Capital Management LLC, among the world's largest hedge fund managers, will introduce another hedge fund-style mutual fund next month, as it expands its reach beyond the biggest investors.

Greenwich, Connecticut-based AQR, a $20 billion firm led by former Goldman Sachs Group Inc (GS.N) star Cliff Asness, led a new wave of hedge funds marketing to the masses when it launched the AQR Diversified Arbitrage Fund ADAIX.O in January.

"We, in about two weeks, expect to introduce a whole new series of style exposures for retail investors," AQR co-founder David Kabiller told Reuters in a rare interview.

Long available only to the ultra rich, "alternative" investments are increasingly being sold to small investors with as little as $5,000 on hand. Highbridge Capital Management, a unit of JPMorgan Chase & Co (JPM.N), led the way in 1995, while Legg Mason Inc's (LM.N) Permal Group hedge fund unit rolled out the Tactical Allocation Fund LPTAX.O in April.

John Rekenthaler, vice president of research and new product development at Morningstar, said about $100 billion was invested in hedge style mutual funds. He expects the number of such offerings to double over the next two years.

AQR is the most ambitious hedge fund firm in this regard. Kabiller said AQR plans over time to offer a series of funds it hopes are innovative and unique in the crowded field.

AQR wants to be regarded as the Vanguard of hedge funds, an advocate of lower cost, better managed portfolios in an industry where hedge funds are secretive, charge high fees and do not always deliver the returns they promise.

"We don't want to be theoretical academics. We want to be the guys who demystify alternative (investments) and tell people what's under the wizard's hat," Kabiller said.

Six decades ago, U.S. regulators divided the investment world into closely watched, long-only mutual funds and hedge funds, lightly regulated pools that can short stocks, use leverage and were exclusive to large or wealthy investors.

But those lines are getting more blurry by the day. In just the past week, Van Eck Global became the latest manager to unveil a hedge style fund, while Bull Path Hedge Fund converted itself into a mutual fund.

Into the fray jumps AQR, a firm that relishes going against the flow. Last month, when most hedge funds were cowed after President Obama criticized Chrysler creditors as "speculators," Asness drafted a widely distributed letter that defended funds and took issue with Obama's actions.

One plan in the works is "AQR University," which will tap the firm's more than 20 finance professors and PhD's on staff to help make investors more comfortable with hedge fund strategies.

That said, Kabiller said hedge funds by design should never be allowed to get too big. With only 60 mergers pending at any one time, arbitrage strategies would suffer with too many assets.

"The stuff we're doing on the alternative side, if we're true to it, has real finite capacity," he said.

Which is why AQR intends to offer a series of retail funds, including some strategies that can be expanded to several billion dollars.