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AQR Style Premia Fund

2. Perspective on Alternatives
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Perspective on Alternatives
Historical Perspective
Fees generally high relative to what was delivered
Most strategies pitched as having extremely high risk-adjusted returns and low correlation but possessed neither
Current Perspective
Fees have started to come down to more reasonable levels
Academic evidence supporting systematic returns and diversification potential associated with some hedge fund strategies
Many strategies are now available in liquid mutual fund form

3. AQR Style Premia Fund (QSPRX)
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AQR Style Premia Fund (QSPRX)
Strategy
Seeks to deliver value, momentum, carry and defensive premiums across multiple asset classes
Low correlation with stock and high-quality bond markets
Net-of-cost expected return of 5% above risk-free rate
Managed at 10% annualized volatility
Structure and Costs
Open-ended mutual fund with daily liquidity
Employs modest leverage
Expense ratio: 1.40%

4. Comparison to Current Equity Strategy
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Comparison to Current Equity Strategy
Similarities
Same systematic approach that attempts to capture return premiums that have been uncovered by the academic community
All rules based, not traditional “active” management
Very diversified
Differences
Long/Short
Uses leverage
In addition to equities includes equity indices, fixed income, currencies and commodities
Uses derivatives

5. Value and Momentum Investing
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Value and Momentum Investing
Value
Securities that have underperformed over intermediate-term periods tend to outperform in the future.
Momentum
Securities that have outperformed over short-term periods tend to continue to outperform in the future.
Strategy tends to be negatively correlated with value and therefore offers diversification of value strategies.

6. Annualized Returns to Value and Momentum 1/1983-11/2015
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Annualized Returns to Value and Momentum 1/ /2015
Performance data provided by AQR Capital Management and does not include the deduction of an advisory fee or transaction costs. Past performance is no guarantee of future results. Please see disclosures at the end of the presentation for information regarding hypothetical performance.

7. Expected Impact of 10% QSPRX Allocation
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Risk and Return
Expected Impact of 10% QSPRX Allocation
If Taken From Equities
Lower portfolio volatility
Improvement in expected risk-adjusted returns
If Taken From Fixed Income
Higher expected returns
Higher portfolio volatility
Source: BAM’s capital market assumptions as of 12/2015.

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Appendix

9. Value Intuition Evidence Implementation
Value securities are “beaten up,” distressed, “unglamorous” or less-favored by investors
Investors may overextrapolate growth prospects, resulting in overpricing of growth/glamour stocks
Value strategies tend to perform poorly when liquidity dries up and are short a structural break, and value assets may have greater default risk and tend to co-move
Evidence
Within U.S. stocks (1926), international stocks (1984), across equity country indices (1975)
Across country bonds (1975) and interest rates (1992)
Across currencies (1975)
Across commodities (1975)
Implementation
Stocks/industries and country indices: book-to-price, earnings-to-price, forecasted earnings-to-price, cash flow-to-price, sales-to-enterprise value
Bonds: yields minus inflation forecasts
Interest rates: forward rates minus inflation forecasts
Currencies: purchasing power parity, reversal in real exchange rates
Commodities: reversal in three- to five-year returns
Source: AQR Capital Management
These are potential elements of the strategy and will not always lead to successful investing. Past performance is not an indication of future performance.

10. Momentum Intuition Evidence Implementation
Securities or investments that have performed relatively well (or poorly) over the past year tend to continue to perform well (or poorly) over the short term
May be explained by investor initial under-reaction to news and subsequent herding/continued over-reaction, and other behavioral biases like the disposition effect
Momentum securities tend to move together, which may denote a common risk
Evidence
Within U.S. stocks (1927), international stocks (1984), across equity country indices (1975)
Across country bonds (1975) and interest rates (1990)
Across currencies (1975)
Across commodities (1975)
Implementation
Stocks/Industries and Country Indices: price- and fundamental-based measures (e.g., analyst revisions)
Bonds: price- and yield-based measures
Interest rates: price- and rates-based measures
Currencies: price- and fundamental-based (e.g., changes in terms of trade)
Commodities: price-based measures
Source: AQR Capital Management
These are potential elements of the strategy and will not always lead to successful investing. Past performance is not an indication of future performance.

11. Carry Intuition Evidence Implementation
High (or low) yields may indicate excess demand for (or supply of) capital
In FX, for example, expected capital offsets (appreciation/depreciation) have not materialized, possibly due to inefficiencies of non-profit-seeking participants such as central banks
May be compensation for negative skewness and losses in “bad times,” especially FX
Evidence
Across country bonds (1991) and interest rates (1990)
Across currencies (1983)
Across commodities (1980)
Implementation
Bonds: measures of yield curve slope
Interest rates: roll-down yield
Currencies: cash rates and real rates
Commodities: slope of the futures curve
Source: AQR Capital Management
These are potential elements of the strategy and will not always lead to successful investing. Past performance is not an indication of future performance.

12. Defensive Intuition Evidence Implementation
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Defensive
Intuition
Leverage aversion may explain why low-risk assets offer higher risk-adjusted returns
Unlevered investors typically seek high-beta assets for more “bang-for-the-buck”
Investors tend to overpay for “lottery” characteristics
Evidence
Within U.S. stocks (1926), international stocks (1984), across equity country indices (1984)
Within U.S. Treasuries (1952), across country bonds (1965)
Implementation
Stocks/industries and country indices: forecasted beta, leverage and earnings variability
Bonds: beta to international index, duration
Source: AQR Capital Management
These are potential elements of the strategy and will not always lead to successful investing. Past performance is not an indication of future performance.

13. Instruments Used: Stocks, Futures, Swaps and Currency Forwards
Overview of Styles and Asset Groups Harvest Style Premia Across Multiple Asset Groups
Value
Momentum
Carry
Defensive
Stocks & Industries
Equity Indices
Fixed Income*
Currencies
Commodities
Stocks & Industries
Equity Indices
Fixed Income*
Currencies
Commodities
Stocks & Industries
Equity Indices
Fixed Income*
Currencies
Commodities
Stocks & Industries
Equity Indices
Fixed Income*
Currencies
Commodities
Instruments Used: Stocks, Futures, Swaps and Currency Forwards
Source: AQR Capital Management
*Fixed Income includes bonds, interest rate and yield curve strategies.
Specific exposures are subject to change and not all styles are applicable in all contexts.

14. Diversification Across Asset Groups and Styles Target Strategic Risk Allocation
18%
15%
30%
34%
15%
14%
20%
34%
20%
Risk is first allocated to asset groups to take advantage of natural netting and style interaction
Asset group allocation seeks to balance maximum diversification with breadth, liquidity and leverage considerations
Within each asset group, risk is allocated in a balanced manner to available styles
Resulting overall style exposure is balanced and diversified
Source: AQR Capital Management Risk allocation is complex and subject to change. The allocations above are representative of a theoretical AQR Style Premia strategy and do not represent actual allocations of any AQR client portfolio or strategy; actual allocations for a client portfolio may vary from this example. The risk allocation represents the ratio of strategy/style volatility allocations relative to the total sum of volatilities. Variance contributions are an alternative and also useful way of viewing risk allocations. Representative portfolio information is supplemental to the GIPS® compliant presentation for the Style Premia Composite included in the Appendix. Diversification does not eliminate the risk of experiencing investment losses.

15. Important Disclosures Regarding Simulated Strategies
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Important Disclosures Regarding Simulated Strategies
The following pages include illustrations of returns for the types of portfolios we design for clients.
The Simulated Strategies may or may not be the actual allocation determined to be appropriate for any individual clients, and a client may or may not follow the Simulated Strategies. Clients with the allocations shown may have different results based on capital flows, timing of rebalancing decisions, fees charged or other factors.
Our investment strategy is based on the principles of Modern Portfolio Theory (MPT). The tenets of MPT provide for a passive, long-term, buy-and-hold strategy implemented through globally diversified portfolios. Mutual funds representing asset classes where academic research has demonstrated higher expected returns for the level of risk taken are combined into a single portfolio. Portfolios are constructed with low-correlating components to provide diversification for the purpose of reducing the risk caused by volatility. Commodities may be added to some client portfolios for the purpose of additional risk reduction and not necessarily to provide higher expected returns in such portfolios. Portfolios are rebalanced to maintain agreed-upon asset allocations.
The historical performance information that follows is provided to demonstrate the methodology used in building portfolios using the aforementioned investment strategy. This information should not be considered as a demonstration of actual performance results or actual trading using client assets and should not be interpreted as such. The results may not reflect the impact that material economic and market factors may have had on the advisor’s decision-making in managing actual client accounts. Past performance is not a guarantee of future results. The investment returns and principal value of mutual funds recommended by our firm will fluctuate and may be worth more or less than their original cost when sold. A client may experience a loss when implementing an investment strategy. Advisor utilizes both tax-managed funds and corresponding funds that are not tax managed in constructing client accounts. The Simulated Strategies returns presented use fund returns that are not tax managed. While the tax-managed funds are consistent with the passive approach we follow, they should not be expected to regularly track the performance of corresponding taxable funds in the same or similar asset classes. As such, the performance of portfolios using tax-managed funds will vary from portfolios that do not use these funds.
Results assume ordinary income and capital gains distributions are reinvested, annual rebalancing and no income taxes. If performance reflects the deduction of an advisory fee billed quarterly in advance, it is indicated on the page. More information about mutual fund fees and expenses is available in the prospectus for each mutual fund.
The simulated strategy returns are benchmarked to the Standard & Poor's 500 Index (“S&P 500”) and the Morgan Stanley Capital International Europe, Australasia and Far East Index (“MSCI EAFE”), which are unmanaged capitalization-weighted equity-only indices. The benchmarks are used for comparative purposes only as commonly utilized benchmarks. Financial indicators and benchmarks are unmanaged, do not reflect any management fees, assume reinvestment of income, are for illustration purposes only, and have limitations when used for such purposes because they may have volatility, credit, or other material characteristics, including no fixed income allocation, that are different from simulated strategies. Investments made for the portfolios Advisor manages according to its strategies will differ significantly in terms of security holdings (including an allocation to fixed income), industry weightings, and market capitalization from those of the aforementioned indices. Advisor has managed numerous other model simulated strategies and has maintained information related to these strategies, including performance information. A complete listing and description of all model simulated strategies is available upon request.