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A ride to remember

The fortunes of investment companies are tied like no others to the direction of financial markets. Their own stocks go up when times are good and usually head south when everyone is taking it in the portfolio.

That's hardly rocket science, and it's easy to see why shares of Affiliated Managers Group Inc., a Beverly holding company that owns interests in more than two dozen investment firms, appreciated for much of this year and then took their lumps in recent weeks.

But AMG's roller coaster ride, which has left the company's stock price very close to where it started the year, is remarkable for two reasons. Its highs and lows were more dramatic than at most other investment companies, and a single affiliate among AMG's 25 portfolio firms played a big role in pushing the stock in both directions. That firm, quantitative hedge fund operator AQR Capital Management, remains a big focus of investors today.

"At first, people wanted to jump on that train and, once we started to see some of the quantitative managers break down, it certainly seemed like people headed for the exits," said analyst Jeffrey Ptak, who follows Affiliated Managers for Morningstar Inc.

AMG shares shot up from about $104 in mid-March to a peak of nearly $135 by July 6. Business was very good across the company, and AMG even increased its earnings guidance from investors, citing hedge fund performance fees.

AQR, which uses mathematical models to select and time investments, was an important part of the company's hedge-fund interests. Affiliated Managers owned about 25 percent of the Greenwich, Conn., firm founded nine years ago by former Goldman Sachs standout Clifford Asness. AQR was an undeniable investment star but, more importantly, it looked by spring as though principals were seriously considering a public stock offering of their own.

It's hard to say how much value the stock market would place on AQR, but public offerings by alternative investment firms were hot topics. Fortress Investment Group had launched its own IPO in February with great success and The Blackstone Group, a private equity firm, was in the pipeline.

Reasonable estimates for an AQR stock offering suggested the firm might be worth $4 billion or more. A reception like that would mean the share owned by Affiliated Managers might be worth about $1 billion. Keep in mind, AMG's entire business is valued at about $3.2 billion today.

The market's generally good fortunes, the hedge-fund exposure at Affiliated Managers, and prospects of a public offering by AQR were a powerful combination. At its peak, Affiliated Managers stock had doubled in just two years. Then the market went seriously wrong.

Affiliated Managers wasn't just another investment firm caught in a difficult market. Suddenly, its hedge-fund exposure prompted more questions. AQR, in particular, was a high-profile quant firm, exactly the kind getting clobbered. By mid-August, Asness told investors one of the firm's riskier funds had lost 21 percent of its value, year to date.

It took less than six weeks for Affiliated Managers stock to sink from $134 to below $105. The allure of quant hedge funds in general and AQR in particular worked just as potently against Affiliated Managers shares.

Where Affiliated Managers stock moves next depends on the direction of the market. AQR will earn a little less, but it's a relatively small part of the whole financial picture.

That entire picture, with contributions from lots of investment firms, will come to look a little safer but less exciting than everyone thought just a couple of months ago.