An alternative to alternative investments [QSPIX]
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Re: An alternative to alternative investments [QSPIX]
Since we are talking alternative investments, I would be interested in Larry's and others' thoughts on investing in managed futures. AQR has such a vehicle and the research that I have done suggests that their strategy should also be an excellent diversifier, perhaps with a more established track record than QSPIX.
Any (non-snide) comments?
Any (non-snide) comments?
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Re: An alternative to alternative investments [QSPIX]
If Larry is going to praise a fund, I think it is helpful to know that he's committing some of his own money to it; and I think it is helpful (and probably required) for him to disclose that he is not a completely disinterested party.dimdum wrote:sig·nif·i·cantDisclosure: I have a significant personal investment in the fund and it was approved by the investment policy committee of my firm, Buckingham, as a 401(k) plan option.
dict: sufficiently great or important to be worthy of attention; noteworthy.
Are you sure Larry its not typo, 3% is considered noise and not significant personal investment.I have about a 3% allocation
Hope that helps
Larry
larryswedroe
And I personally think it is very forthcoming of him to put a percentage number on it.
To me, I read his remarks as saying that this is an experimental, exploratory (as in "core-and-explore") holding of his, made by someone who fully understands and likes the strategy, is able to gauge the risks. He's not saying it's for everyone. He's saying that if you are intrigued by this strategy, it is a promising way to implement it.
Last edited by nisiprius on Thu Nov 20, 2014 11:53 am, edited 1 time in total.
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Re: An alternative to alternative investments [QSPIX]
Nisiprius
Good summary of the way I think about it.
And I certainly understand the concern on expenses, was difficult "pill" for me to swallow, but in end I reminded myself of these two points which we can lose sight of
a) in the end it's not about cost but value added
b) millions of people know the cost of everything and value of nothing
Larry
Good summary of the way I think about it.
And I certainly understand the concern on expenses, was difficult "pill" for me to swallow, but in end I reminded myself of these two points which we can lose sight of
a) in the end it's not about cost but value added
b) millions of people know the cost of everything and value of nothing
Larry
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Re: An alternative to alternative investments [QSPIX]
dimdum
That's matter of perspective. And certainly the larger the size of the portfolio the more significant the 3% figure gets.
In my case I would say 3% is significant which is why I used that term.
Larry
That's matter of perspective. And certainly the larger the size of the portfolio the more significant the 3% figure gets.
In my case I would say 3% is significant which is why I used that term.
Larry
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Re: An alternative to alternative investments [QSPIX]
Runningrad
If were going to do managed futures would want passive strategy. Meaning it's relying on the historical evidence, in this case for things like momentum and value and carry type strategies. Not people's opinions.
Most managed futures are trend following, either relative or absolute momentum. So if that is the case you are investing in the momentum factor. Would prefer to see it diversified across sources though, not just say commodities, but others might have different view.
Note I don't have investment in a managed futures fund but QSPIX has component in MOM.
Larry
If were going to do managed futures would want passive strategy. Meaning it's relying on the historical evidence, in this case for things like momentum and value and carry type strategies. Not people's opinions.
Most managed futures are trend following, either relative or absolute momentum. So if that is the case you are investing in the momentum factor. Would prefer to see it diversified across sources though, not just say commodities, but others might have different view.
Note I don't have investment in a managed futures fund but QSPIX has component in MOM.
Larry
Re: An alternative to alternative investments [QSPIX]
If Larry is buying individual Treasuries and munis for his bond allocation, which is, IIRC, 70% - 80% of his portfolio, then his weighted average expense ratio is likely pretty low. For someone with high expenses in their 401k, it might be a problem.
In any case, if this thing turns out to be a solid diversifier, it could earn its keep even if it doesn't make oodles of money. So, how much diversification are we talking about? I'd love to see a chart that shows how much it would be expected to take down a standard deviation for a given stock allocation, e.g. 30%, 50%, 70%.
So, very interesting, but I don't think I completely understand it. Maybe I need to read the Cliff Notes version of the Ilmanen book. Something for the long winter evenings here in the frozen North.
In any case, if this thing turns out to be a solid diversifier, it could earn its keep even if it doesn't make oodles of money. So, how much diversification are we talking about? I'd love to see a chart that shows how much it would be expected to take down a standard deviation for a given stock allocation, e.g. 30%, 50%, 70%.
So, very interesting, but I don't think I completely understand it. Maybe I need to read the Cliff Notes version of the Ilmanen book. Something for the long winter evenings here in the frozen North.
"My bond allocation is the amount of money that I cannot afford to lose." -- Taylor Larimore
Re: An alternative to alternative investments [QSPIX]
Hmm, the waiver of fees down to 1.5% is only found in the small print in the prospectus at the fidelity site, as opposed to being listed on the main info page. Looks like they would feature it a little more prominently. The waiver expires in April 2015. Does management usually continue these fee waivers, or should we expect the fees to go up to the 2.15 in April?
Mike
Mike
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Re: An alternative to alternative investments [QSPIX]
Funds that attempt to capture non-beta premiums like this one rely on two things for either long term outperformance or some enhancement in risk/reward tradeoff relative to beta.
First that the future of financial markets will be, if not a replay of the past, at least very similar to it. Backtesting has demonstrated outperformance of these strategies in past decades going back to the 1920s. Some argue that in many of those past decades where much of this data originated financial markets were less efficient than now, driven more by non-institutional mom and pop stock pickers whereas today markets are largely driven by full time professionals, all of whom are fully familiar with factor research and all of whom are seeking the elusive alpha full time. For example, does more money currently seek SCV than in the 1930s, 1940s, etc., and does that diminish the expected premium going forward? I suspect that it does and that the premium for SCV in long only portfolios will be no more than 1% - 2% going forward even for those patient investors who have the strong hands to hold on during the inevitable periods of underperformance relative to beta, periods that may last more than a decade.
Theoretically long-short portfolios do a better job of fully capturing these non-beta premiums, but they increase costs significantly both from increased trading and from increased management expenses. They also reduce tax efficiency and add complexity. To my knowledge such funds have not yet demonstrated that their after-cost, after-tax returns to investors have overcome these hurtles. Hence I do not use them.
In short, IMHO going forward from here there may be a considerable gap between the expected returns of the various non-beta factors based on what past history has delivered and what the future actually delivers. The same is likely true of beta as well although at least index beta can be counted on for low cost and increased tax efficiency which is a certainty rather than a sound theory. Rational arguments can be made for beta only portfolios or for heavily factor tilted or even long-short factor portfolios based on personal preference. Personally, realizing that I don't know the future, I don't put all my eggs into one basket, mostly TSM with modest factor exposure added on.
Garland Whizzer
First that the future of financial markets will be, if not a replay of the past, at least very similar to it. Backtesting has demonstrated outperformance of these strategies in past decades going back to the 1920s. Some argue that in many of those past decades where much of this data originated financial markets were less efficient than now, driven more by non-institutional mom and pop stock pickers whereas today markets are largely driven by full time professionals, all of whom are fully familiar with factor research and all of whom are seeking the elusive alpha full time. For example, does more money currently seek SCV than in the 1930s, 1940s, etc., and does that diminish the expected premium going forward? I suspect that it does and that the premium for SCV in long only portfolios will be no more than 1% - 2% going forward even for those patient investors who have the strong hands to hold on during the inevitable periods of underperformance relative to beta, periods that may last more than a decade.
Theoretically long-short portfolios do a better job of fully capturing these non-beta premiums, but they increase costs significantly both from increased trading and from increased management expenses. They also reduce tax efficiency and add complexity. To my knowledge such funds have not yet demonstrated that their after-cost, after-tax returns to investors have overcome these hurtles. Hence I do not use them.
In short, IMHO going forward from here there may be a considerable gap between the expected returns of the various non-beta factors based on what past history has delivered and what the future actually delivers. The same is likely true of beta as well although at least index beta can be counted on for low cost and increased tax efficiency which is a certainty rather than a sound theory. Rational arguments can be made for beta only portfolios or for heavily factor tilted or even long-short factor portfolios based on personal preference. Personally, realizing that I don't know the future, I don't put all my eggs into one basket, mostly TSM with modest factor exposure added on.
Garland Whizzer
Re: An alternative to alternative investments [QSPIX]
In the other thread, Larry said that AQR fully intends to keep the fee waiver. SEC just requires that an end date be listed so they periodially review whether the fees are suitable.mhalley wrote:Hmm, the waiver of fees down to 1.5% is only found in the small print in the prospectus at the fidelity site, as opposed to being listed on the main info page. Looks like they would feature it a little more prominently. The waiver expires in April 2015. Does management usually continue these fee waivers, or should we expect the fees to go up to the 2.15 in April?
Mike
Regardless, fees would not go up to 2.15%. The fee waiver is currently only 0.04%. According to the AQR web site, fees are broken up as follows:
Code: Select all
Management Fee: 1.35%
Acquired Fund Fees: 0.04%
Other Expenses
Dividends On Short Sales: 0.57%
All Other Expenses: 0.19%
Gross Expenses: 2.15%
Less: Fee Waivers: 0.04%
Net Expenses: 2.11%
0.19% for all other expenses must include the following according to the prospectus: "interest, taxes, borrowing costs, acquired fund fees and expenses (listed twice for some reason), interest expense relating to short sales, and extraordinary expenses." There isn't any more granular detail about which portion is which, and I'm not sure whether the remaining fees are worth worring about or if they are being double counted in some way. Acquired fund fees and expenses generally don't matter.
Re: An alternative to alternative investments [QSPIX]
Fair point I suppose. I think what is obviously going on here is that Larry is a HNW individual methinks and probably has a fair amount of raw dollars in this fund but not a high percentage of his assets. Two ways of looking at it.dimdum wrote:Are you sure Larry its not typo, 3% is considered noise and not significant personal investment.Disclosure: I have a significant personal investment in the fund and it was approved by the investment policy committee of my firm, Buckingham, as a 401(k) plan option.
Edit: Ooops, Somehow missed Larry's earlier response regarding this point.
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Re: An alternative to alternative investments [QSPIX]
I'm not sure if these articles have been posted before, if so, apologies. The first two articles explain in very simple terms exactly what the fund is supposed to do for your portfolio. Essentially it's the diversification Holy Grail: increase returns while reducing volatility. The price of this magic is, of course, the dreaded tracking error. The last article reviews the fund's performance in detail.
http://grandstreetwm.wordpress.com/2014 ... er-part-1/
http://grandstreetwm.wordpress.com/2014 ... er-part-2/
http://grandstreetwm.wordpress.com/2014 ... ear-later/
http://grandstreetwm.wordpress.com/2014 ... er-part-1/
http://grandstreetwm.wordpress.com/2014 ... er-part-2/
http://grandstreetwm.wordpress.com/2014 ... ear-later/
"My bond allocation is the amount of money that I cannot afford to lose." -- Taylor Larimore
Re: An alternative to alternative investments [QSPIX]
Thanks!scone wrote:I'm not sure if these articles have been posted before, if so, apologies. The first two articles explain in very simple terms exactly what the fund is supposed to do for your portfolio. Essentially it's the diversification Holy Grail: increase returns while reducing volatility. The price of this magic is, of course, the dreaded tracking error. The last article reviews the fund's performance in detail.
http://grandstreetwm.wordpress.com/2014 ... er-part-1/
http://grandstreetwm.wordpress.com/2014 ... er-part-2/
http://grandstreetwm.wordpress.com/2014 ... ear-later/
Re: An alternative to alternative investments [QSPIX]
Here's a question for Larry. If an investor adds QSPIX (or anything for that matter), how does he go about determining if it was beneficial or not? I suppose that after a year or so, we could compare returns and volatility to what it would have been with the original portfolio; e.g., if I replaced 5% of my bond allocation with QSPIX I can compare to the performance of the original portfolio as if the change hadn't been made. But how can I know if the results were just random? It's quite possible performance could be worse with QSPIX, as well as better with QSPIX. But does that mean anything? How does one make a determination that Portfolio A is "better" than Portfolio B?
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Re: An alternative to alternative investments [QSPIX]
Browser
You can find if if it was beneficial by doing what you suggest. Look at return of old portfolio vs. new one with the new fund. But have to be careful about that, especially with very short period results like not just one year but a few. And don't want to make mistake of confusing strategy with outcome. In other words you invested because you believed that OVER the long term the four styles would be positive, but knowing that even for some long periods they may be negative.
With a fund like this, or other passive fund the big thing I want to be watching is the fund doing what it is supposed to be doing? Is any tracking error to its benchmark random or because of bad decisions? In this case or with any other higher turnover fund would want to see how trading costs are impacting results---did you get what you expected or did trading costs eat up premiums (if they existed).
In my case I am lucky in that I get to sit in on a quarterly conference call where fund managers walk through a VERY DETAILED what is called attribution analysis, showing where the returns came from (by style and by group). So that helps.
Hope that answers your question.
Larry
You can find if if it was beneficial by doing what you suggest. Look at return of old portfolio vs. new one with the new fund. But have to be careful about that, especially with very short period results like not just one year but a few. And don't want to make mistake of confusing strategy with outcome. In other words you invested because you believed that OVER the long term the four styles would be positive, but knowing that even for some long periods they may be negative.
With a fund like this, or other passive fund the big thing I want to be watching is the fund doing what it is supposed to be doing? Is any tracking error to its benchmark random or because of bad decisions? In this case or with any other higher turnover fund would want to see how trading costs are impacting results---did you get what you expected or did trading costs eat up premiums (if they existed).
In my case I am lucky in that I get to sit in on a quarterly conference call where fund managers walk through a VERY DETAILED what is called attribution analysis, showing where the returns came from (by style and by group). So that helps.
Hope that answers your question.
Larry
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Re: An alternative to alternative investments [QSPIX]
There's nothing new about this. In the beginning, the burning question on bogleheads (then the Vanguard Diehards on Morningstar) was whether to add Vanguard U.S. Growth to our VFINX holdings and whether international should be held at all. He introduced us to Fama French and the small and value premiums and he did it in time for many of us to sidestep a part of the crash of 2001-2003. He also introduced us to REITs, although IIRC, Rick Ferri was a bigger proponent. And then CCFs. And then momentum and ... (I haven't really been keeping track lately)longinvest wrote:It is increasingly transforming into a SwedroeHeads forum, instead. We get Swedroe articles posted and discussed almost every other day.dimdum wrote:High ER, alternative investment, 50$ transaction fee, not even a year old.
And I thought this is BH forum.
All of these discussions are on topic and are valid for a bogleheads approach, which is about planning more than anything else. Larry just presents what's out there (he literally wrote the book on alternative investments options) and we can take as little or as much as we want. FWIW, I slice and dice as far as small and value and hold an allocation to TIAA Real Estate, but I draw the line at CCFs and am highly unlikely to incorporate the more exotic asset classes he likes to talk about.
Re: An alternative to alternative investments [QSPIX]
I find AQR funds very interesting, but I am more and more skeptical that they can offer value to ordinary investors. At the end of the day, whether you treat them as active or passive funds (I say "active"), they have some of the biggest negatives associated with active funds: higher expense ratios, higher trading costs, location problem (any volatile asset class that is taken from the equity side needs to consider this, as Larry often discusses the "location problem" of junk bonds). I suppose one negative of active funds that the AQR funds may not have is style drift. But, in general, they exhibit more similarities than dissimilarities to active funds, imo.
I, especially, am skeptical on momentum going forward, due to the lack of a risk story. It is exposing your money in hopes of speculative gains (Graham's so-called Voting Machine), and has nothing to do with intrinsic value (his so-called Weighing Machine), which to me, is the real reason why we invest, and why it is a LONGterm endeavor. Yes, there is some great data to support momentum. But when there is no risk story, how does one assess whether it has stopped working? If the most important factor in investing is staying the course, then we must have strategies that we understand and endorse, and to me, a risk story is necessary. Let's say momentum stops working for 5 years. Do you assume it has stopped forever or do you hold on? I think most of us would continue to believe in the equity risk premium after 5 years of underperformance. But I cannot have that kind of faith in a trading strategy based on speculative gains. Regarding momentum, yes, we have historical evidence in its persistence. But we also have a body of evidence that trading strategies that beat the market (without incurring more risk) tend to eventually go away. The second body of evidence is stronger, imo, and this is why the more I consider all of these financial ideas, the more I realize Bogle's advice to generally own the market should remain the default advice for investors. I love the discussions and look forward to learning more from Swedroe, in any case.
I, especially, am skeptical on momentum going forward, due to the lack of a risk story. It is exposing your money in hopes of speculative gains (Graham's so-called Voting Machine), and has nothing to do with intrinsic value (his so-called Weighing Machine), which to me, is the real reason why we invest, and why it is a LONGterm endeavor. Yes, there is some great data to support momentum. But when there is no risk story, how does one assess whether it has stopped working? If the most important factor in investing is staying the course, then we must have strategies that we understand and endorse, and to me, a risk story is necessary. Let's say momentum stops working for 5 years. Do you assume it has stopped forever or do you hold on? I think most of us would continue to believe in the equity risk premium after 5 years of underperformance. But I cannot have that kind of faith in a trading strategy based on speculative gains. Regarding momentum, yes, we have historical evidence in its persistence. But we also have a body of evidence that trading strategies that beat the market (without incurring more risk) tend to eventually go away. The second body of evidence is stronger, imo, and this is why the more I consider all of these financial ideas, the more I realize Bogle's advice to generally own the market should remain the default advice for investors. I love the discussions and look forward to learning more from Swedroe, in any case.
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Re: An alternative to alternative investments [QSPIX]
Oneleaf
All good points. I consider AQR fund passive because there are rules that are implemented in transparent, systematic, mechanistic way that is replicable. The trading costs are not as high as you would think because they aren't buyers of liquidity, using patient trading strategies. And yes on location, if don't have room in tax advantaged accounts then should not own them. But one can typically own munis instead in taxable accounts instead of taxables in tax advantaged to create room (and often that can even be more tax efficient). I don't see any similarities with active funds since there is no judgment applied basically, and no fundamental analysis nor any timing which to me are the two traits of active.
Re momentum, I agree that one should be somewhat skeptical, but there are good limits to arbitrage and behavioral reasons to expect it to persist, and it has existed for decades after publication and it exists all over the world in all asset classes, despite being known for many decades---I used momentum based models for FX and interest rates 40 years ago. Even Fama himself threw in towel on that one 11 years ago now.
Best wishes
Larry
All good points. I consider AQR fund passive because there are rules that are implemented in transparent, systematic, mechanistic way that is replicable. The trading costs are not as high as you would think because they aren't buyers of liquidity, using patient trading strategies. And yes on location, if don't have room in tax advantaged accounts then should not own them. But one can typically own munis instead in taxable accounts instead of taxables in tax advantaged to create room (and often that can even be more tax efficient). I don't see any similarities with active funds since there is no judgment applied basically, and no fundamental analysis nor any timing which to me are the two traits of active.
Re momentum, I agree that one should be somewhat skeptical, but there are good limits to arbitrage and behavioral reasons to expect it to persist, and it has existed for decades after publication and it exists all over the world in all asset classes, despite being known for many decades---I used momentum based models for FX and interest rates 40 years ago. Even Fama himself threw in towel on that one 11 years ago now.
Best wishes
Larry
Re: An alternative to alternative investments [QSPIX]
This study appears to substantiate a conclusion that adding alternatives to a traditional Target Date Fund portfolio is a good idea. Perhaps I didn't read it carefully, but I'm unable to draw a conclusion. Is there an optimal percentage allocation to alternatives and what should those alternative investments be?
http://www.bnymellonretirement.com/asse ... n_2014.pdf
http://www.bnymellonretirement.com/asse ... n_2014.pdf
Re: An alternative to alternative investments [QSPIX]
.
Have done a bit more due diligence on the fund – a few findings:
1. The fund uses a broad application of value, momentum, carry, and defensive – including across equities, bonds, interest rates, currencies, commodities. It goes beyond factor tilts only in equities (more commonly used). For example, for value, this could include for bonds: yield minus inflation forecasts and for currencies, purchasing power parity (see linked Ilmanen presentation http://www.iiforums.com/risk&liquidity/ ... en_AQR.pdf ).
2. The ‘size’ factor is not included, as its difficult to apply beyond equity markets (as I understand).
3. Simulated returns are extraordinarily high, but so are estimated trade costs. Slide 25 of Ilmanen’s presentation (linked above), has the excess average returns above t-bills for the ‘style factor composite’ from 1990 to 2012 to be 25.2%! with volatility of 10 (presume standard deviation). It is surprising, in that it is a multiple of the returns of each of the styles on their own. Initially I thought it was a typo, but also saw it in a presentation by Toby Moskowitz. The paper by Ronen Israel and Thomas Maloney on “Understanding Style Premia” ( included in the in linked package https://www.azasrs.gov/sites/default/fi ... -18-14.pdf ) present simulated returns from 1990 to 2013. The individual excess returns of value, momentum, carry, and defensive range from 9.1% to 13.0%, but for the “Raw Composite” excess return it is 25.9%? They go on to say …”The performance shown …is too high to be the basis of return expectations.” And present a 10.2% return as “a more realistic portfolio that applies conservative estimated transaction costs and further heavily discounts the Sharpe ratio to adjust for any upward biases that might be present in the results”. That’s a significant reduction… if trade costs are that large, and the style premiums decline, not sure about resulting returns. Nevertheless AQR seem conscious of this, and seem to focus explicitly to reduce these costs. If we add back the t-bill returns (that averaged 3.2% over this period), then the average ‘adjusted’ style premia composite return from 1990-2013 was 13.4% (10.2+3.2), with a volatility of 10 (which is about the target volatility of the AQR fund).
4. ‘Adjusted’ style composite risk/returns characteristics look favorable. I compared the above characteristics to a portfolio with my factor load targets (within equities, 1:0.2:0.4 market:size:value loads, with a US:EAFE:EM allocation of 50:37:13 respectiviely, and within bonds, a 0.5 term load). A 56:44 stock:bond combination gets to the same target volatility (standard deviation of 10), with average returns of 10.6% (annualized = 10.1%), which is a lower than the style premium average ‘gross’ returns of 13.4% (with standard deviation of 10), or 11.9% with 1.5% expense ratio deduction.
5. The strongest case for inclusion, IMO, is performance in inflationary recessions. Even if the risk/return characteristic of the style premium fund were the same as the 56:44 ‘standard’ portfolio above (e.g. 10% return, with standard deviation of 10), there is still a diversification case that can be made for inclusion in a portfolio IMO. This follows the work on Risk Parity. Bridgewater identifies 4 market conditions that affect capital markets in different ways – growth (expansion), recession (contraction), inflation, and disinflation. They argue that as we don’t know the sequencing and duration of these over our investment lifetime (expect surprises) that we should diversify across asset classes which do well in each of these environments, and not concentrate assets in those that only do well in one or two of these environments. This is along the lines of the permanent portfolio. While periods of inflation and disinflation have occurred with about equal frequency from 1928 (about 50:50 time split); growth (expansion) has occurred for much longer durations than recessions (contraction) (about 80:20 percent of the time since 1928). And within this period, inflationary recessions have occurred about 8 percent of the time. It is during these periods that stocks do particularly badly (-17 percent annualized over cash, according to Samuel Lee of Morningstar http://www.morningstar.com/advisor/t/73 ... ingle=true ). I got similar results. Asset classes generally don't perform well over this period. In a recent article, Ilmanen and others came to a similar conclusion …”Certain environments are particularly challenging. ..when slow growth coincides with high inflation … it is difficult to find any asset class of style premium that has matched or exceeded its long-run performance”. http://www.iinews.com/site/pdfs/JPM_Spring_2014_AQR.pdf . While these environments have only occurred in the US about 8 percent of the time since 1928, there is no knowing whether this share will be higher or lower (over our investment lifetime), but is can have a significant negative effect on an equity heavy portfolio. According to the above Ilmanen et al article, however, a style premium composite performed relatively well across different market environments, including in inflationary periods that were coupled with slow growth (contraction/recession). It is in these periods that a style premium composite seems to add the most diversifying value to a ‘tradition factor tilted portfolio” (arguably providing the greatest case for consideration in a portfolio). Taking an even share from stocks and bonds for a style premia allocation is consistent with the above analysis, in that over 1990-2013 it had the characteristics of about a 50:50 stock:bond allocation.
Just my take.
Robert
.
Have done a bit more due diligence on the fund – a few findings:
1. The fund uses a broad application of value, momentum, carry, and defensive – including across equities, bonds, interest rates, currencies, commodities. It goes beyond factor tilts only in equities (more commonly used). For example, for value, this could include for bonds: yield minus inflation forecasts and for currencies, purchasing power parity (see linked Ilmanen presentation http://www.iiforums.com/risk&liquidity/ ... en_AQR.pdf ).
2. The ‘size’ factor is not included, as its difficult to apply beyond equity markets (as I understand).
3. Simulated returns are extraordinarily high, but so are estimated trade costs. Slide 25 of Ilmanen’s presentation (linked above), has the excess average returns above t-bills for the ‘style factor composite’ from 1990 to 2012 to be 25.2%! with volatility of 10 (presume standard deviation). It is surprising, in that it is a multiple of the returns of each of the styles on their own. Initially I thought it was a typo, but also saw it in a presentation by Toby Moskowitz. The paper by Ronen Israel and Thomas Maloney on “Understanding Style Premia” ( included in the in linked package https://www.azasrs.gov/sites/default/fi ... -18-14.pdf ) present simulated returns from 1990 to 2013. The individual excess returns of value, momentum, carry, and defensive range from 9.1% to 13.0%, but for the “Raw Composite” excess return it is 25.9%? They go on to say …”The performance shown …is too high to be the basis of return expectations.” And present a 10.2% return as “a more realistic portfolio that applies conservative estimated transaction costs and further heavily discounts the Sharpe ratio to adjust for any upward biases that might be present in the results”. That’s a significant reduction… if trade costs are that large, and the style premiums decline, not sure about resulting returns. Nevertheless AQR seem conscious of this, and seem to focus explicitly to reduce these costs. If we add back the t-bill returns (that averaged 3.2% over this period), then the average ‘adjusted’ style premia composite return from 1990-2013 was 13.4% (10.2+3.2), with a volatility of 10 (which is about the target volatility of the AQR fund).
4. ‘Adjusted’ style composite risk/returns characteristics look favorable. I compared the above characteristics to a portfolio with my factor load targets (within equities, 1:0.2:0.4 market:size:value loads, with a US:EAFE:EM allocation of 50:37:13 respectiviely, and within bonds, a 0.5 term load). A 56:44 stock:bond combination gets to the same target volatility (standard deviation of 10), with average returns of 10.6% (annualized = 10.1%), which is a lower than the style premium average ‘gross’ returns of 13.4% (with standard deviation of 10), or 11.9% with 1.5% expense ratio deduction.
5. The strongest case for inclusion, IMO, is performance in inflationary recessions. Even if the risk/return characteristic of the style premium fund were the same as the 56:44 ‘standard’ portfolio above (e.g. 10% return, with standard deviation of 10), there is still a diversification case that can be made for inclusion in a portfolio IMO. This follows the work on Risk Parity. Bridgewater identifies 4 market conditions that affect capital markets in different ways – growth (expansion), recession (contraction), inflation, and disinflation. They argue that as we don’t know the sequencing and duration of these over our investment lifetime (expect surprises) that we should diversify across asset classes which do well in each of these environments, and not concentrate assets in those that only do well in one or two of these environments. This is along the lines of the permanent portfolio. While periods of inflation and disinflation have occurred with about equal frequency from 1928 (about 50:50 time split); growth (expansion) has occurred for much longer durations than recessions (contraction) (about 80:20 percent of the time since 1928). And within this period, inflationary recessions have occurred about 8 percent of the time. It is during these periods that stocks do particularly badly (-17 percent annualized over cash, according to Samuel Lee of Morningstar http://www.morningstar.com/advisor/t/73 ... ingle=true ). I got similar results. Asset classes generally don't perform well over this period. In a recent article, Ilmanen and others came to a similar conclusion …”Certain environments are particularly challenging. ..when slow growth coincides with high inflation … it is difficult to find any asset class of style premium that has matched or exceeded its long-run performance”. http://www.iinews.com/site/pdfs/JPM_Spring_2014_AQR.pdf . While these environments have only occurred in the US about 8 percent of the time since 1928, there is no knowing whether this share will be higher or lower (over our investment lifetime), but is can have a significant negative effect on an equity heavy portfolio. According to the above Ilmanen et al article, however, a style premium composite performed relatively well across different market environments, including in inflationary periods that were coupled with slow growth (contraction/recession). It is in these periods that a style premium composite seems to add the most diversifying value to a ‘tradition factor tilted portfolio” (arguably providing the greatest case for consideration in a portfolio). Taking an even share from stocks and bonds for a style premia allocation is consistent with the above analysis, in that over 1990-2013 it had the characteristics of about a 50:50 stock:bond allocation.
Just my take.
Robert
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Re: An alternative to alternative investments [QSPIX]
Don't you think that investors are being driven toward these rather exotic investments by the miserable returns we see everywhere? We look at bonds and see nada return forever and the possibility of capital losses if interest rates ever start to rise. We look at stocks and see that expected returns have been driven into the ground and we're staring at the possibility of capital losses from these elevated valuation levels. Gold and commodities, yesterday's favorite alternates, have handed us terrible losses over the last few years and aren't looking like they're getting better anytime soon. So, maybe factor investing is the secret sauce? Or maybe it's the last refuge of the desperate.... I'm not sure.
We don't know where we are, or where we're going -- but we're making good time.
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Re: An alternative to alternative investments [QSPIX]
I agree with you completely. If we were in a different market environment, there would probably be less interest in these products among the mutual fund buying public.Browser wrote:Don't you think that investors are being driven toward these rather exotic investments by the miserable returns we see everywhere? We look at bonds and see nada return forever and the possibility of capital losses if interest rates ever start to rise. We look at stocks and see that expected returns have been driven into the ground and we're staring at the possibility of capital losses from these elevated valuation levels. Gold and commodities, yesterday's favorite alternates, have handed us terrible losses over the last few years and aren't looking like they're getting better anytime soon. So, maybe factor investing is the secret sauce? Or maybe it's the last refuge of the desperate.... I'm not sure.
Few decisions in life motivated by greed ever have happy outcomes--Peter Bernstein, The 60/40 Solution
Re: An alternative to alternative investments [QSPIX]
Longinvest...You know if all anyone posted here was the pure boglehead philosophy it would be so boring that it would be not worth visiting ever again after the first time.There is more than enough pure boglehead.
K.I.S.S........so easy to say so difficult to do.
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Re: An alternative to alternative investments [QSPIX]
Hoops, I think that you're right.
I just read a 100% Bogleheadish foreword by Larry Swedroe (if scored according the 10 BH principles) in Rick Van Ness' Why Bother With Bonds book.
I humbly apologize for my earlier comment. I should be grateful that Larry tells us about his latest findings and agrees to openly debate of his ideas with us. And, if I get annoyed by some thread, nobody forces me to continue reading it. I shouldn't have complained based my own personal preferences.
I just read a 100% Bogleheadish foreword by Larry Swedroe (if scored according the 10 BH principles) in Rick Van Ness' Why Bother With Bonds book.
I humbly apologize for my earlier comment. I should be grateful that Larry tells us about his latest findings and agrees to openly debate of his ideas with us. And, if I get annoyed by some thread, nobody forces me to continue reading it. I shouldn't have complained based my own personal preferences.
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
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Re: An alternative to alternative investments [QSPIX]
Biggest issue for us ordinary DIY Bogleheads is the $5 million minimum investment.
Best regards, -Op |
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"In the middle of difficulty lies opportunity." Einstein
Re: An alternative to alternative investments [QSPIX]
Incorrect. On page one of this thread Tramper Al actually placed an order at Fidelity (see his post below). Also, if you have any type of adviser relationship (even low cost/virtual) then you can get access to this fund.Call_Me_Op wrote:Biggest issue for us ordinary DIY Bogleheads is the $5 million minimum investment.
"I just now successfully placed an order for $2500 of QSPIX in a taxable account at Fidelity. There was a warning about the 49.95 fee and other that required I read and sign a special notice indicating that I am a sophisticated investor, understand the risks, etc."
Last edited by matjen on Sun Nov 23, 2014 6:12 pm, edited 2 times in total.
A man is rich in proportion to the number of things he can afford to let alone.
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Re: An alternative to alternative investments [QSPIX]
You can also get the fund in the N class, no load, no sales charge, 0.25% 12b-1 fee add to exp ratio..matjen wrote:Incorrect. On page one of this thread Tramper actually placed an order at Fidelity (see his post below). Also, if you have any type of adviser relationship (even low cost/virtual) then you can get access this fund.Call_Me_Op wrote:Biggest issue for us ordinary DIY Bogleheads is the $5 million minimum investment.
"I just now successfully placed an order for $2500 of QSPIX in a taxable account at Fidelity. There was a warning about the 49.95 fee and other that required I read and sign a special notice indicating that I am a sophisticated investor, understand the risks, etc."
Few decisions in life motivated by greed ever have happy outcomes--Peter Bernstein, The 60/40 Solution
Re: An alternative to alternative investments [QSPIX]
Yes, yes, the continuing search for portfolio diversifiers. I have come to the conclusion that as investors we have to tolerate market volatility and sometimes more than we expect or like. We have to allow enough time for our portfolios to recover. We all want the higher returns of equities but we don't want the volatility.
The "secret sauce" of diversification started with diversifying across many securities, then across asset classes, and now we should consider factor investing. I wonder if investing in too many factors at once gives you a "cancelling out" effect where you get a market return minus all the expenses. For example value and momentum are polar opposites. Momentum and defensive? That is trying to be aggressive and conservative at the same time. Wouldn't it be better to pick two, get the premium and ride out the volatility?
For example, my best guess is that momentum strategies would have worked great in from 1995 to early 2000, when large growth investing was all the rage. Since the larger growth stocks have much higher trading volumes, you could execute a momentum strategy at lower costs than with small cap stocks. Value would have worked much better from 2000-2007. Particularly small value. I would think momentum would have gotten killed during the 2000-2002 and 2008-2009 bear markets. The problem is, we don't know ahead of time what factors will work best at which times. During the 1995-early 2000 and the 2000 to 2007 time periods, wouldn't momentum and value cancelled each other out? To successfully execute all four types of factor investing at once, wouldn't this involve an element of timing?
During the 2008-2009 bear market, value was just taken out and shot and my suspicion is that the same happened to momentum. I also suspect small stocks did poorly compared to their large cap cousins. So during that bear market, three out of the four factors would have gone down more than the broad market and perhaps only the defensive factor would have worked!
I have to admit that I have done the factor investing without realizing it and diversified across asset classes, and darn it, my portfolio can still be more volatile than I like. If there is a secret sauce out there, I sure have not found it. I keep trying.
The "secret sauce" of diversification started with diversifying across many securities, then across asset classes, and now we should consider factor investing. I wonder if investing in too many factors at once gives you a "cancelling out" effect where you get a market return minus all the expenses. For example value and momentum are polar opposites. Momentum and defensive? That is trying to be aggressive and conservative at the same time. Wouldn't it be better to pick two, get the premium and ride out the volatility?
For example, my best guess is that momentum strategies would have worked great in from 1995 to early 2000, when large growth investing was all the rage. Since the larger growth stocks have much higher trading volumes, you could execute a momentum strategy at lower costs than with small cap stocks. Value would have worked much better from 2000-2007. Particularly small value. I would think momentum would have gotten killed during the 2000-2002 and 2008-2009 bear markets. The problem is, we don't know ahead of time what factors will work best at which times. During the 1995-early 2000 and the 2000 to 2007 time periods, wouldn't momentum and value cancelled each other out? To successfully execute all four types of factor investing at once, wouldn't this involve an element of timing?
During the 2008-2009 bear market, value was just taken out and shot and my suspicion is that the same happened to momentum. I also suspect small stocks did poorly compared to their large cap cousins. So during that bear market, three out of the four factors would have gone down more than the broad market and perhaps only the defensive factor would have worked!
I have to admit that I have done the factor investing without realizing it and diversified across asset classes, and darn it, my portfolio can still be more volatile than I like. If there is a secret sauce out there, I sure have not found it. I keep trying.
A fool and his money are good for business.
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Re: An alternative to alternative investments [QSPIX]
The more and more I read and learn and see about investing the more I agree with this. The best diversifier to stocks is just time. If one can weather the storm I am not sure there will be a cheaper, non correlating diversifier then that.nedsaid wrote:Yes, yes, the continuing search for portfolio diversifiers. I have come to the conclusion that as investors we have to tolerate market volatility and sometimes more than we expect or like. We have to allow enough time for our portfolios to recover. We all want the higher returns of equities but we don't want the volatility.
This new fund may be the greatest thing on earth, but if history is any example it won't. NO ONE has done it yet and doubt any one will. Now I will agree I seem MANY trying. Guess it is human behavior to think you can control more in the world then you actually can.
Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” |
-Jack Bogle
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Re: An alternative to alternative investments [QSPIX]
Some observations...
1: Very few people have the assets to commit $5m to an alternative fund.
2: So if people are to access this fund, they need an advisor.
3: Its great news that there are advisors on this board who offer ARQ funds!!!!! Yay!
4: 1.5% ER + ~0.5% Advisor Fee + ~0.5% transaction & tax drag = ~2.5% - Vanguard TSM costs of say 0.1% = 2.4% delta per annum to overcome
5: Bogle, for whom this forum is named, has long and eloquently advocated for low costs, and against what I believe he would agree in this case is the tyranny of high costs. The simple power of humble arithmetic.
6: Those high costs sure do benefit those advisors though! YAY!
As for peer reviewed papers. This is a rather interesting read, which should give pause to anyone banking on research of the past: http://www.iflscience.com/technology/jo ... iling-list
And of course, even if the research of the past is accurate... past is rarely prolog.
I believe George Carlin said it best, "its all BS, and its bad for you."
1: Very few people have the assets to commit $5m to an alternative fund.
2: So if people are to access this fund, they need an advisor.
3: Its great news that there are advisors on this board who offer ARQ funds!!!!! Yay!
4: 1.5% ER + ~0.5% Advisor Fee + ~0.5% transaction & tax drag = ~2.5% - Vanguard TSM costs of say 0.1% = 2.4% delta per annum to overcome
5: Bogle, for whom this forum is named, has long and eloquently advocated for low costs, and against what I believe he would agree in this case is the tyranny of high costs. The simple power of humble arithmetic.
6: Those high costs sure do benefit those advisors though! YAY!
As for peer reviewed papers. This is a rather interesting read, which should give pause to anyone banking on research of the past: http://www.iflscience.com/technology/jo ... iling-list
And of course, even if the research of the past is accurate... past is rarely prolog.
I believe George Carlin said it best, "its all BS, and its bad for you."
Re: An alternative to alternative investments [QSPIX]
Ignatious,
Last time you made a personal attack against Larry regarding the same point, someone corrected you to state that you can buy AQR funds at Fidelity and TD Ameritrade with low minimums and without an advisor. In this thread alone, it has been mentioned a few times as well. Why do you continue to ignore such an important fact just so you can make another dig at an advisor?
Last time you made a personal attack against Larry regarding the same point, someone corrected you to state that you can buy AQR funds at Fidelity and TD Ameritrade with low minimums and without an advisor. In this thread alone, it has been mentioned a few times as well. Why do you continue to ignore such an important fact just so you can make another dig at an advisor?
Re: An alternative to alternative investments [QSPIX]
Someone didn't read the thread. Check four posts before yours.Ignatious P. Daily wrote:Some observations...
1: Very few people have the assets to commit $5m to an alternative fund.
2: So if people are to access this fund, they need an advisor.
3: Its great news that there are advisors on this board who offer ARQ funds!!!!! Yay!
4: 1.5% ER + ~0.5% Advisor Fee + ~0.5% transaction & tax drag = ~2.5% - Vanguard TSM costs of say 0.1% = 2.4% delta per annum to overcome
5: Bogle, for whom this forum is named, has long and eloquently advocated for low costs, and against what I believe he would agree in this case is the tyranny of high costs. The simple power of humble arithmetic.
6: Those high costs sure do benefit those advisors though! YAY!
As for peer reviewed papers. This is a rather interesting read, which should give pause to anyone banking on research of the past: http://www.iflscience.com/technology/jo ... iling-list
And of course, even if the research of the past is accurate... past is rarely prolog.
I believe George Carlin said it best, "its all BS, and its bad for you."
Re: An alternative to alternative investments [QSPIX]
It appears you aren't observing much unfortunately.Ignatious P. Daily wrote:Some observations...
1: Very few people have the assets to commit $5m to an alternative fund.
2: So if people are to access this fund, they need an advisor.
3: Its great news that there are advisors on this board who offer ARQ funds!!!!! Yay!
4: 1.5% ER + ~0.5% Advisor Fee + ~0.5% transaction & tax drag = ~2.5% - Vanguard TSM costs of say 0.1% = 2.4% delta per annum to overcome
5: Bogle, for whom this forum is named, has long and eloquently advocated for low costs, and against what I believe he would agree in this case is the tyranny of high costs. The simple power of humble arithmetic.
6: Those high costs sure do benefit those advisors though! YAY!
As for peer reviewed papers. This is a rather interesting read, which should give pause to anyone banking on research of the past: http://www.iflscience.com/technology/jo ... iling-list
And of course, even if the research of the past is accurate... past is rarely prolog.
I believe George Carlin said it best, "its all BS, and its bad for you."
Points 1 & 2 are both false. This was discussed on page 1 of the thread and pretty much directly above your post on page 2. Even if you do need an adviser there are plenty of ways to do that. Though I appreciate you didn't go down the 1% of AUM route which is just about the most expensive in point #4. Even so, I have an "adviser" and pay a flat $1,000 a year for my entire household (all my accounts and my wife's accounts).
A man is rich in proportion to the number of things he can afford to let alone.
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Re: An alternative to alternative investments [QSPIX]
Well, that lets me out. I will not put my signature on a fib, so I cannot buy anything that requires me to sign something saying I am a sophisticated investor.Tramper Al wrote:I just now successfully placed an order for $2500 of QSPIX in a taxable account at Fidelity. There was a warning about the 49.95 fee and other that required I read and sign a special notice indicating that I am a sophisticated investor, understand the risks, etc.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
Re: An alternative to alternative investments [QSPIX]
.
Following my earlier post – a bit more due diligence.
Probably good time to re-read the linked FF article: Tilted portfolios, hedge funds, and portable alpha.
http://www.chicagobooth.edu/news/pdf/Ti ... 200605.pdf
It emphasizes the following:
(i) long-short portfolios are an expense way to tilt (relative to long only). If you hold a market portfolio and add a long-short hedge fund for non-beta factor exposure, you will be shorting stocks you are holding in other parts of your portfolio. From the article - "Its hard to justify the high cost of simultaneously buying and shorting the same stocks, or of maintaining offsetting long and short positions." Its cheaper to hold long-only portfolios in the overall net positions you want to hold, rather than shorting out, in one part of your portfolio, long position held in another part. Arguable the benefit of the style premia fund is it covers multiple markets (equities, fixed income, commodities, and currencies), using multiple sorts whose net position (at an overall portfolio level when this fund is added) are difficult to achieve with long-only exposure, particularly in the combination it uses. I have not tried to replicate (at portfolio level) with long-only positions in these markets (for portfolios that are not 100% in the aqr style premia fund).
(ii) while leverage can amplify the upside, it also amplifies the downside. So perhaps there is more (relative negative skewness) risk in the fund than reflected by the standard deviation.
Robert
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Following my earlier post – a bit more due diligence.
Probably good time to re-read the linked FF article: Tilted portfolios, hedge funds, and portable alpha.
http://www.chicagobooth.edu/news/pdf/Ti ... 200605.pdf
It emphasizes the following:
(i) long-short portfolios are an expense way to tilt (relative to long only). If you hold a market portfolio and add a long-short hedge fund for non-beta factor exposure, you will be shorting stocks you are holding in other parts of your portfolio. From the article - "Its hard to justify the high cost of simultaneously buying and shorting the same stocks, or of maintaining offsetting long and short positions." Its cheaper to hold long-only portfolios in the overall net positions you want to hold, rather than shorting out, in one part of your portfolio, long position held in another part. Arguable the benefit of the style premia fund is it covers multiple markets (equities, fixed income, commodities, and currencies), using multiple sorts whose net position (at an overall portfolio level when this fund is added) are difficult to achieve with long-only exposure, particularly in the combination it uses. I have not tried to replicate (at portfolio level) with long-only positions in these markets (for portfolios that are not 100% in the aqr style premia fund).
(ii) while leverage can amplify the upside, it also amplifies the downside. So perhaps there is more (relative negative skewness) risk in the fund than reflected by the standard deviation.
Robert
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Re: An alternative to alternative investments [QSPIX]
This fund uses leverage - which itself gives me pause (aside from the expenses and other risks). What is the maximum possible loss? Can the investor be liable for losses that exceed his/her initial investment?
Best regards, -Op |
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"In the middle of difficulty lies opportunity." Einstein
Re: An alternative to alternative investments [QSPIX]
.
A useful read - Asness on risks and justification for use of leverage. While the article is focused on the Risk Parity fund, it also seems relevant to the Style Premia fund. https://www.aqr.com/cliffs-perspective/ ... ight-lever . Just to note that the largest decline in the risk parity fund to date was a 13% decline over a month and a half around mid 2013. Its overall loss, however in 2013 was -0.23, which was less than the 2% decline for the permanent portfolio (another risk parity fund, that does not use leverage).
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A useful read - Asness on risks and justification for use of leverage. While the article is focused on the Risk Parity fund, it also seems relevant to the Style Premia fund. https://www.aqr.com/cliffs-perspective/ ... ight-lever . Just to note that the largest decline in the risk parity fund to date was a 13% decline over a month and a half around mid 2013. Its overall loss, however in 2013 was -0.23, which was less than the 2% decline for the permanent portfolio (another risk parity fund, that does not use leverage).
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Re: An alternative to alternative investments [QSPIX]
3% of a 5M+ portfolio is not 'insignificant' either. Thanks for the information. I would be very interested if the fund could hit 80 basis points or less as ER.
Any hope a similar product could be released by a large player or by this group with lower ER?
Any hope a similar product could be released by a large player or by this group with lower ER?
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Re: An alternative to alternative investments [QSPIX]
I am not calling out anyone in particular. I was warned about that and respect that rule.oneleaf wrote:Ignatious,
Last time you made a personal attack against Larry regarding the same point, someone corrected you to state that you can buy AQR funds at Fidelity and TD Ameritrade with low minimums and without an advisor. In this thread alone, it has been mentioned a few times as well. Why do you continue to ignore such an important fact just so you can make another dig at an advisor?
What I will say is that if I were interested in my investors well-being over my own I would:
- make my company a mutual structure
- invest substantial amounts of my personal wealth into what I sold
- minimize costs
What I would do if I wanted to support my well-being over my investors
- make investing complicated
- play on the need of people to "not be average"
- align to historical empirical data to claim a fiduciary responsibility while implying out-performance, without committing to out-performance
- share how to "implement these complex strategies on the cheap, at small scale." But really... the wealthy clients I have clearly benefit from paying me.
Everyone gets to make their own choices. Just do so eyes open to the possible motivations of those giving you advice. And for the record, I stand to gain nothing from my advise.
Re: An alternative to alternative investments [QSPIX]
LTCM.
As they say in Vegas, good luck.
As they say in Vegas, good luck.
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Re: An alternative to alternative investments [QSPIX]
Hi Larry,
I just added a 4% allocation to CCFs in my equity rich substantially tilted portfolio. How would this fund mix?
Dave
I just added a 4% allocation to CCFs in my equity rich substantially tilted portfolio. How would this fund mix?
Dave
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Re: An alternative to alternative investments [QSPIX]
Random
Personally if I had to choose one or the other I would choose this fund. Having said that currently own both.
If you take from the equity allocation and buy QSPIX my expectation is about same returns but less vol, so higher SR and less downside risk. For those with moderate to high equity allocations that would be my choice
For those with very low equity allocations you might consider doing what I did which was to take from bond side. Here SD is higher, but not all that higher, say going from 5 to 10, but with bonds having no expected real return pretty much and this having say 4-5% IMO that is good trade. So for small amount I think that is worth considering---but only if have very low equity allocation to begin with.
Personally if I had to choose one or the other I would choose this fund. Having said that currently own both.
If you take from the equity allocation and buy QSPIX my expectation is about same returns but less vol, so higher SR and less downside risk. For those with moderate to high equity allocations that would be my choice
For those with very low equity allocations you might consider doing what I did which was to take from bond side. Here SD is higher, but not all that higher, say going from 5 to 10, but with bonds having no expected real return pretty much and this having say 4-5% IMO that is good trade. So for small amount I think that is worth considering---but only if have very low equity allocation to begin with.
Re: An alternative to alternative investments [QSPIX]
.
QPSIX already has 15% allocation to "commodities".
QPSIX already has 15% allocation to "commodities".
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Re: An alternative to alternative investments [QSPIX]
Is it actually a commodity exposure, or is it a momentum strategy that goes long commodities trending up and short commodities trending down with no net exposure to commodities in total? I'm thinking that this fund actually trades on four themes - value, momentum, carry and defensive - with very little or no actual exposure to asset classes like commodities or U.S. equities.Robert T wrote:.
QPSIX already has 15% allocation to "commodities".
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Re: An alternative to alternative investments [QSPIX]
Robert/DaufuskieNate
QPSIX has no net exposure to commodities. What it does have is long positions and offsetting short positions. So long positive momentum and short negative momentum. Long backwardation and short contango.
Same type thing in currencies, where no net positions, but long high yielding currencies and short low yielding ones, long positive momentum and short negative momentum
Larry
QPSIX has no net exposure to commodities. What it does have is long positions and offsetting short positions. So long positive momentum and short negative momentum. Long backwardation and short contango.
Same type thing in currencies, where no net positions, but long high yielding currencies and short low yielding ones, long positive momentum and short negative momentum
Larry
Re: An alternative to alternative investments [QSPIX]
So have we resolved whether the fund is actively managed?
Larry says "no". Alex says "yes" and quotes the prospectus that not only states plainly that it is actively managed (which might settle the issue), but then proceeds to describe an active approach. Larry, in what sense do you consider a fund that says it is actively managed, and describes its activities as quoted not to be active?
In this fund, you can view it as paying 0.75% on the entire portfolio, then paying 0.75% on the entire portfolio again. Total 1.5%. Just arithmetic.
Note that any boglehead who holds a diversified portfolio has lots of things within it that have low or zero correlations with other things in it. Your short term fixed income has a low correlation with your large cap stocks. Many of your individual stocks have very low correlations with each other. Your foreign small value (in your total international stock fund) have little correlation with your intermediate term munis. You do not need to pay someone more than 14 basis points to have a portfolio filled with things with little correlation with other things in it.
If you object that you want a portfolio entirely composed of things that have low correlations with each other, then you need hold only a single asset representing each factor. As soon as you hold multiple, say, "value" stocks, then you have stocks that are quite highly correlated with one another.
Or you could just buy VTI, VWIUX, VXUS and save yourself ~1.4% in fees.
Larry says "no". Alex says "yes" and quotes the prospectus that not only states plainly that it is actively managed (which might settle the issue), but then proceeds to describe an active approach. Larry, in what sense do you consider a fund that says it is actively managed, and describes its activities as quoted not to be active?
No. If that were true, then the expense ratio would be 0.75%. If you pay 0.75% on one half of a portfolio- call it "half A" and 0.75% on the other half- call it "half B), then you are paying 0.75% on the total. Just arithmetic., the way to view the expense ratio of QSPIX is that you are paying 0.75% for the long position and 0.75% for the short position
In this fund, you can view it as paying 0.75% on the entire portfolio, then paying 0.75% on the entire portfolio again. Total 1.5%. Just arithmetic.
Note that any boglehead who holds a diversified portfolio has lots of things within it that have low or zero correlations with other things in it. Your short term fixed income has a low correlation with your large cap stocks. Many of your individual stocks have very low correlations with each other. Your foreign small value (in your total international stock fund) have little correlation with your intermediate term munis. You do not need to pay someone more than 14 basis points to have a portfolio filled with things with little correlation with other things in it.
If you object that you want a portfolio entirely composed of things that have low correlations with each other, then you need hold only a single asset representing each factor. As soon as you hold multiple, say, "value" stocks, then you have stocks that are quite highly correlated with one another.
Or you could just buy VTI, VWIUX, VXUS and save yourself ~1.4% in fees.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either |
--Swedroe |
We assume that markets are efficient, that prices are right |
--Fama
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Re: An alternative to alternative investments
Yes, and doesn't a 1.5% ER violate the most basic of "Boglehead" principles? One can live quite well on the expense ratio alone.dad2000 wrote:Yes $5M, but maybe one could gain access through an advisor by paying an additional wrap fee?
Larry: I know that your feelings are that QSPIX is worth 150bp for the factor exposure, but I have my doubts that many of us would find the fund useful. I consider my standard of living to be pretty high, but if I had $5M liquid to invest in this fund, I could just as easily invest it in safe assets (annuities, bonds, TIPs) and retire on the income it would throw off. Also, I see that the ER is only contractually guaranteed through next year, but that the actual expenses are significantly higher which would be a concern for me.
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Re: An alternative to alternative investments [QSPIX]
Few thoughts
First, if you had a long only portfolio you would have $1,000 invested and have loading (or exposure to) of about one half of the factor and expense of 1.5%
Here you have $,1000 of long exposure and $1,000 of short giving you a loading of 1 on the factor for the 1.5% expense. Clearly when viewed in the right perspective the fund is adding twice the value of a long only portfolio for the same fee.
Second, protoganist, there is a reason that a cliche is that millions of people know the price of everything and value of nothing. Expenses clearly matter and they matter a lot. But it's value added that matters more. Obviously I believe the fee is worth the benefit or I would not invest my own money.
Best wishes
Larry
First, if you had a long only portfolio you would have $1,000 invested and have loading (or exposure to) of about one half of the factor and expense of 1.5%
Here you have $,1000 of long exposure and $1,000 of short giving you a loading of 1 on the factor for the 1.5% expense. Clearly when viewed in the right perspective the fund is adding twice the value of a long only portfolio for the same fee.
Second, protoganist, there is a reason that a cliche is that millions of people know the price of everything and value of nothing. Expenses clearly matter and they matter a lot. But it's value added that matters more. Obviously I believe the fee is worth the benefit or I would not invest my own money.
Best wishes
Larry
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Re: An alternative to alternative investments [QSPIX]
This makes sense to me, Larry.larryswedroe wrote:Few thoughts
First, if you had a long only portfolio you would have $1,000 invested and have loading (or exposure to) of about one half of the factor and expense of 1.5%
Here you have $,1000 of long exposure and $1,000 of short giving you a loading of 1 on the factor for the 1.5% expense. Clearly when viewed in the right perspective the fund is adding twice the value of a long only portfolio for the same fee.
Second, protoganist, there is a reason that a cliche is that millions of people know the price of everything and value of nothing. Expenses clearly matter and they matter a lot. But it's value added that matters more. Obviously I believe the fee is worth the benefit or I would not invest my own money.
Best wishes
Larry
But if it boils down to subjective belief, then you could potentially say the same about any mutual fund with a high ER if one believes that the fund's manager is good enough, no? You are clearly far more knowledgeable than the average investor and your subjective feeling about this being worth 1.5%/yr is not something you just pulled out of a hat. It may be valid. But that said, to me the approach seems peculiarly anti-Swedroe, Bogle, et al. That doesn't make it wrong- just seems odd.
Re: An alternative to alternative investments [QSPIX]
This, of course, presumes one would be willing to pay 1.5%, or some figure above zero, in expense ratio for the short component of the portfolio. The history of long/short funds is not encouraging.larryswedroe wrote: Here you have $,1000 of long exposure and $1,000 of short giving you a loading of 1 on the factor for the 1.5% expense
From my perspective, it will take us 20-30 years to know whether the fund is adding any value at all to a long only portfolio.... when viewed in the right perspective the fund is adding twice the value of a long only portfolio...
It would be "the same fee" if the long-only portfolio also had a 1.5% expense ratio. Since one can get a long-only portfolio for 1/15th of that price, it is hard to agree with "for the same fee".for the same fee
It would be more accurate to say that one is getting a long/short portfolio for 15 times the price of a long-only portfolio.
Again, it will take us decades to know whether this fund performs as well as a simple three-fund portfolio.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either |
--Swedroe |
We assume that markets are efficient, that prices are right |
--Fama
Re: An alternative to alternative investments [QSPIX]
I think another way of looking at the expense issue is that this mutual fund is using some newer/more advanced techniques that were almost only found in certain hedge funds a few years ago. Instead of paying 200 basis points and 20% of any returns you are no getting the strategy for "just" 150 basis points. Whether QSPIX's strategy is worth that price over a 60/40 portfolio at 10 basis points over the next decade+...who knows.protagonist wrote:
This makes sense to me, Larry.
But if it boils down to subjective belief, then you could potentially say the same about any mutual fund with a high ER if one believes that the fund's manager is good enough, no? You are clearly far more knowledgeable than the average investor and your subjective feeling about this being worth 1.5%/yr is not something you just pulled out of a hat. It may be valid. But that said, to me the approach seems peculiarly anti-Swedroe, Bogle, et al. That doesn't make it wrong- just seems odd.
A man is rich in proportion to the number of things he can afford to let alone.