One of the problems at Goldman was that the firm would not leave the men alone to just manage the $7 billion--their first love--and kept after them to mentor others and to provide quant tools and analyses for the marketing department. "We were a support group as well as an asset-manager group," Asness explained. The final straw came one night when Kabiller was on a blind date with a woman whose father, a big hedge-fund manager, was going to invest in a fund being started by one of their recently decamped Goldman colleagues, who the team thought was a mediocre investor. In the middle of the date, Kabiller called Asness and told him how outrageous this seemed. "We had a feeling like, 'Gee, are we gonna be the guys sitting in IBM and watch this entrepreneurial guy go and leave and become really successful?' " Kabiller said. The departure process lasted a year. "Of agonizing," Asness said.

Finally, in early 1998, the four men left Goldman to start Applied Quantitative Research. By August, AQR had raised a $1 billion hedge fund, thought to be one of the largest initial hedge funds of all time, only slightly smaller than the one raised by the infamous Long-Term Capital Management, which opened in February 1994 with a group of star bond traders from Salomon Brothers and two Nobel laureates. This was a time when the allure of hedge funds of many different stripes--not just quantitative hedge funds--was growing across Wall Street. Physicists and mathematicians were fleeing academic departments to enter finance. Goldman was losing alpha males convinced of their own investing prowess. Hedge funds were cultivating an air of invincibility. Nerds were suddenly cool, and everywhere. (One hedge-fund manager I spoke with recalled working next to a group of quants in his office and thinking to himself, "This is the geek tank. They were behind glass. They had their headsets on all day, just computer programming.") According to Lo, the MIT professor, the number of quant-style hedge funds grew from something like 50, in January 1994, to nearly 700 by the peak in 2007.

As it happened, AQR had started just months before Long-Term Capital blew up (and needed to be rescued), and in the midst of the Internet bubble, when anything related to the Web seemed to double or triple in price overnight. It was a world of irrational momentum, an environment that could not have been worse for Asness's investing style. In 1999, AQR owned a bunch of seemingly undervalued stocks, in businesses like banking and manufacturing, while holding short positions on seemingly overpriced tech stocks. The firm was getting killed, bringing to mind Keynes's famous observation that the market "can stay irrational longer than you can stay solvent."

Within AQR's first 20 months, its $1 billion fund was reduced to $400 million. The firm was near complete collapse, but Asness fought hard to keep it alive. He added to his value investments as the bubble inflated and kept his short positions in place, with the hope that he could capitalize when it popped. He met repeatedly with investors, and argued that he would be proved correct once the hysteria subsided. And indeed, things soon turned around. From 2000 to 2002, in a bear market, AQR "made a ton of money," Asness said, and then for the next few years "made decent money" in a generally bull market. The firm nearly lost it all again in the August 2007 fiasco, and suffered along with everyone else during the financial crisis the following year. But because AQR was now more diversified--with products ranging from mutual funds for small investors to a variety of funds available only to sophisticated institutional investors--the threat to its existence was not nearly what it had been in 1999.