Playing it safe is paying off in the stock market right now

moodboard/Getty Images

• AQR's Delphi Long Short Equity Strategy posted a return of 7.1% in January alone.

NEW LOOK

Sign up to get the inside scoop on today’s biggest stories in markets, tech, and business — delivered daily. Read preview

Email address

By clicking “Sign Up”, you accept our Terms of Service and Privacy Policy. You can opt-out at any time.

• Funds like AQR are betting on less risky stocks and still beat the S&P 500, Bloomberg data shows.
• That outperformance is a marked reversal from the past decade when stock-picking hedge funds serially underperformed the market.

Investors passing on the market's hyped-up trades are making bank. 

One fund, AQR Capital Management, saw its Delphi Long Short Equity Strategy post a return of 7.1% in January alone, according to Bloomberg data. The strategy buys less risky stocks with steady cash flows and bets against those of the opposite kind.

That puts AQR well ahead of the S&P 500's measly 1.6% gain in January.

That strong outperformance of the broader market punctuates the shifting tide in today's high interest rate regime. While many stock-picking hedge funds continually failed to beat the market over the past decade, bleeding $150 billion in the past five years alone, higher volatility in today's markets has rewarded choosy investors who are playing it safe.

Funds like AQR pick stocks based on reliable drivers of long-term performance, such as the "quality factor" — or finding companies that can provide consistent profits. It's now the hottest trade of 2024, and a far cry from 2023's growth-focused investing frenzy.

The past two years saw the Fed aggressively tighten the screws on the economy, hiking rates up to over 5% from near-zero levels. Now, as the Fed prepares to pivot, the stock market has been roiled by fluctuating rate-cut expectations, caught between still-hawkish Fedspeak and robust economic data. Amid those market gyrations, analysts like BofA's Savita Subramanian have noted we're in a "stockpicker's environment."

Sure enough, investors have been rewarding companies with strong growth. After an impressive earnings report last week, Meta stock soared 20%. Eli Lilly briefly hit a $700 billion valuation after posting its fourth-quarter results. On the other hand, Tesla's stock skidded 12% after a "train wreck" earnings call.

Other strategies, such as "momentum investing" approaches — or buying stocks with short-term uptrends and selling them when they peak — have also been gaining ground lately. Another money pool under AQR which uses that tactic, the AQR Equity Market Neutral Fund, returned 5.5% in January.