An alternative to alternative investments [QSPIX]

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Johno
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Re: An alternative to alternative investments [QSPIX]

Post by Johno »

Also, correlation in a stock market crisis is a 'compared to what' question. Historical data sets are at best a limited guide, as we all know. And there's no way to know the future, the usual dilemma. However IMO it's reasonable to say that today's very low bond yields make it more likely some future stock market crisis (es) will be driven by sharp bond market sell offs. Therefore, even if one were to show me a long history of overall very low correlation of bonds and stocks and no particular pick up on average of bond/stock correlation in stock crises, I wouldn't be convinced that's wholly relevant to the situation we face now. In a word, I don't think an implicit assumption that high grade bonds (prices) will be going up in the next stock crisis is necessarily valid. Whether any given person makes that assumption in evaluating the potential correlation characteristics of an 'alternative' like QSPIX I don't know, but I wouldn't be surprised if some people did.
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Re: An alternative to alternative investments [QSPIX]

Post by Robert T »

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Another interesting offering from AQR - targeting a long-term beta of 0.5 with value, momentum, and quality exposure (without explicit carry risk exposure). While we only have a very short time period, the fund seems to be delivering on what it says it is targeting https://www.portfoliovisualizer.com/fac ... ctor=false It will use a tactical approach to beta (within 0.3 and 0.7 band). Doing okay so far - provided at least 0.5 load to 4 premiums - mkt, value, momentum, quality. Obviously no guarantees. Interesting to see how factor exposure is packaged in AQR products.
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Re: An alternative to alternative investments [QSPIX]

Post by nisiprius »

Johno wrote:Also, correlation in a stock market crisis is a 'compared to what' question. Historical data sets are at best a limited guide, as we all know. And there's no way to know the future, the usual dilemma. However IMO it's reasonable to say that today's very low bond yields make it more likely some future stock market crisis (es) will be driven by sharp bond market sell offs. Therefore, even if one were to show me a long history of overall very low correlation of bonds and stocks and no particular pick up on average of bond/stock correlation in stock crises, I wouldn't be convinced that's wholly relevant to the situation we face now. In a word, I don't think an implicit assumption that high grade bonds (prices) will be going up in the next stock crisis is necessarily valid. Whether any given person makes that assumption in evaluating the potential correlation characteristics of an 'alternative' like QSPIX I don't know, but I wouldn't be surprised if some people did.
Bonds have historically had near-zero, not negative correlation with stocks, and I honestly don't know where the "negative" idea comes from. It's either recency or a misunderstanding founded on simplistic explanations of correlation and diversification.

I can see investment-grade bonds losing market value due to illiquidity during a crisis--nobody has money to buy them. BUT.

One of the fundamental differences between stocks and bonds, not based on history or statistics, is that the only way to get your capital out of a stock is to sell it on the market. An illiquid stock that can't be sold is almost worthless apart from dividends. But bonds mature. You can get your principal out of them even if nobody will buy them on the market, simply by waiting.
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Re: An alternative to alternative investments [QSPIX]

Post by Johno »

nisiprius wrote:
Johno wrote:Also, correlation in a stock market crisis is a 'compared to what' question. Historical data sets are at best a limited guide, as we all know. And there's no way to know the future, the usual dilemma. However IMO it's reasonable to say that today's very low bond yields make it more likely some future stock market crisis (es) will be driven by sharp bond market sell offs. Therefore, even if one were to show me a long history of overall very low correlation of bonds and stocks and no particular pick up on average of bond/stock correlation in stock crises, I wouldn't be convinced that's wholly relevant to the situation we face now. In a word, I don't think an implicit assumption that high grade bonds (prices) will be going up in the next stock crisis is necessarily valid. Whether any given person makes that assumption in evaluating the potential correlation characteristics of an 'alternative' like QSPIX I don't know, but I wouldn't be surprised if some people did.
Bonds have historically had near-zero, not negative correlation with stocks, and I honestly don't know where the "negative" idea comes from. It's either recency or a misunderstanding founded on simplistic explanations of correlation and diversification.

I can see investment-grade bonds losing market value due to illiquidity during a crisis--nobody has money to buy them. BUT.

One of the fundamental differences between stocks and bonds, not based on history or statistics, is that the only way to get your capital out of a stock is to sell it on the market. An illiquid stock that can't be sold is almost worthless apart from dividends. But bonds mature. You can get your principal out of them even if nobody will buy them on the market, simply by waiting.
I believe if you review you'll see I said "even if one were to show me a long history of overall *very low correlation* of bonds and stocks and no particular pick up on average of bond/stock correlation in stock crises, I wouldn't be convinced that's wholly relevant" **'s added this time. I later did mention the "implicit assumption that high grade bonds (prices) will be going up in the next stock crisis", but while I agree that assumption is not well supported by history on average it's a manifestly common one now, very commonly assumed on posts on this forum.

In any case mark to market movements matter, and I believe it's more likely than it was, because rates are now so low, that stock crises in the near to medium future will be driven by sell offs in bonds. As I said, past history in all different situations is not particularly relevant to that, and to me the rational recognition that one can't predict the future doesn't mean sticking one's head in the sand.

As far as eventual payoff of bonds that's really mixing issues. Again in a relatively short time here I've read at least 100's of posts emphasizing the assumed value of bond *mark to market price movements* in crises, not only with respect to 'alternatives' but also say v. CD's where you're also highly likely to get your full principle if you wait. So I think you're basically knocking over a straw man here.
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Re: An alternative to alternative investments [QSPIX]

Post by JohnnyFive »

Robert T wrote:.
Another interesting offering from AQR - targeting a long-term beta of 0.5 with value, momentum, and quality exposure (without explicit carry risk exposure). While we only have a very short time period, the fund seems to be delivering on what it says it is targeting https://www.portfoliovisualizer.com/fac ... ctor=false It will use a tactical approach to beta (within 0.3 and 0.7 band). Doing okay so far - provided at least 0.5 load to 4 premiums - mkt, value, momentum, quality. Obviously no guarantees. Interesting to see how factor exposure is packaged in AQR products.
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Robert, are you able to explain the difference between the two funds? Seems they have similar factor loadings, but this fund you just pointed us to has better returns, albeit in a short amount of time. How do the two funds differ in their objective and in their execution?
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Re: An alternative to alternative investments [QSPIX]

Post by Ketawa »

QLEIX targets value, momentum, and quality. It invests only in equities. It also has positive beta exposure and tactically adjusts the amount of exposure.

QSPIX targets value, momentum, defensive (similar to quality AFAIK), and carry. It invests in equities, equity indices, commodities, fixed income, and currencies. It has zero exposure to the underlying assets and targets the four main styles exclusively.

Not very comparable IMO. These are two very different investments. It might make more sense to compare QLEIX to QCELX/QICLX/QEELX. Both are different approaches at targeting value, momentum, and quality in world equities.

I also don't know why I would want AQR to be tactically changing my exposure to equities. What is the theoretical basis?
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Re: An alternative to alternative investments [QSPIX]

Post by countmein »

The QLEIX prospectus reads as if the stock-picking is at least partly discretionary, it's hard to tell. A wild guess on my part, but perhaps this product is intended to fill a traditional hedge fund strategy category, namely "long/short", and is not primarily about factor exposure, but is incidentally tilted due to AQR's academic leanings.

The more interesting fund, IMO, is QMNIX, Equity Market Neutral. It is long/short equity with zero targeted beta. It's prospectus reads as if it is primarily concerned with factor exposures (QMJ, HML, UMD), though it doesn't explicitly say that it is non-discretionary (rules based), and specifies no factor targets. It is unfortunately too new to regress in PV, though perhaps someone with a factor regressing spreadsheet at the ready would be willing to run it.
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Re: An alternative to alternative investments [QSPIX]

Post by Robert T »

JohnnyFive wrote:Robert, are you able to explain the difference between the two funds? Seems they have similar factor loadings, but this fund you just pointed us to has better returns, albeit in a short amount of time. How do the two funds differ in their objective and in their execution?
As indicated, the long-short equity fund seems to focus on stocks only, while the style premium fund includes other markets - fixed income, currencies, commodities (using derivatives to provide exposure to all these non-equity markets). This is likely the reason why the former has a R^2 in the (stock) factor analysis in portfoliovisualizer of 0.95, while the latter has a R^2 of around 0.60 (with larger standard errors). Interestingly this corresponds to about 60% of the style premia fund focusing on stocks - here is its broad allocation:

40% - stock selection within equity markets
20% - allocation across equity indices (as I understand)
11% - bonds
4% - interest rate
15% - currencies
10% - commodities

The aggregate factor premiums on stocks have historically been higher than the combination of factor premiums weighted by the allocations above. For example - from Asness et al data on momentum and value here a comparison (just to note that I would expect a similar result for the other factors):

1983-2014 - excess returns above t-bills

For stocks:
Value premium = 4.7%
Momentum premium = 6.3%
50*50 Value:Momentum = 5.5%

For stocks/bonds/currencies/commodities - weighted by the above allocation shares
Value premium = 3.4%
Momentum premium = 5.2%
50*50 Value:Momentum = 4.3%

The stock premiums are higher, but this also comes with higher volatility. And greater diversification of the stocks/bonds/currencies/commodities, led to a higher Sharpe Ratio over this period (26% higher). AQR then leverages up the style premium fund, while the long-short equity funds adds 0.5 beta exposure.

My expectation would be that the long-short portfolio has higher expected return given its sole focus on stocks, and with the addition of beta, but will also have higher volatility. What I am not sure of is how much of the gap in expected return of the style premium fund will be closed by leverage. In theory, using leverage to match expected return, would result in the style premium fund having lower volatility than the long-short portfolio for same expected return. Just not sure that it leverages so much. The other big caveat is that the above analysis looks at the style strategies "combined in isolation" as different allocations, but as we know from the AQR papers, using them in combination on the same security at the same time, can add additional returns.

How to use these in a portfolio. My own take is - set a long-term factor exposure target and structure a portfolio to achieve these at lowest cost. Then the hurdle for inclusion is does a new product help achieve my factor load targets and/or can it do so at lower cost? If you are targeting only value/momentum/quality in stocks then the market neutral, or long-short equity portfolio would get you closer (and more accurately to your target re:R^2 of 0.95) that the style premium funds. If you want more diversification - but less accurate factor load targeting then the style premium fund may make more sense.

Low cost alternatives offer investors a wide range of factors to possibly target. I would only consider these long-short options if factor load targets can't be achieved with any combination of lower cost alternatives. One example of this could be company retirement plan choices only offering funds with beta/market exposure, then adding one of these AQR products could help achieve specific factor load targets - but even still would need to check the numbers, and would only use in tax-advantaged account.

IMO, at least for me, its really important to have a framework to make portfolio decisions (re: target a particular factor exposure at lowest cost, or some other formulation) this provides the bedrock/stability on which to judge whether one product is 'better' than another for inclusion in a portfolio. In the absence of this, its more difficult to distinguish between products as each has different attributes with no scale to weigh these - and opinions vary as different people put their own weights on different attributes. Its important to have you own scale, viewed in an overall portfolio context. This adds some stability to portfolio choice.

Robert
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Harpua26
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QSPIX

Post by Harpua26 »

Does anyone know if Fidelity still offers purchases for below retail minimum purchases of QSPIX(for regular Fidelity accounts)? Their basic quote page lists the standard $5 mill minimum and I wasn't sure if they had ended the lower minimum purchases. I'm not currently a Fidelity customer and the previous thread discussing the issue is a bit out of date and the mods asked me to start a new thread (viewtopic.php?f=10&t=151111).

Thanks,
Michael
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Re: An alternative to alternative investments [QSPIX]

Post by LadyGeek »

Welcome! Your first submission wasn't clear that your intent was to purchase QSPIX. Sorry for the mixup, I moved your post into the original thread.
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Re: An alternative to alternative investments [QSPIX]

Post by Ketawa »

I believe the $5 million initial investment is inaccurate. I will be buying QSPIX this week and can confirm whether my trade goes through.

Three weeks ago, I bought QICNX through Fidelity without any trouble. I think the minimum was only $2500 on the trade confirmation page even though the fund research page said $5 million. I already owned QICLX but didn't have enough to add to make the $50 transaction fee worthwhile instead of the increased expense ratio.
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Re: QSPIX

Post by SnowSkier »

Harpua26 wrote:Does anyone know if Fidelity still offers purchases for below retail minimum purchases of QSPIX(for regular Fidelity accounts)? Their basic quote page lists the standard $5 mill minimum and I wasn't sure if they had ended the lower minimum purchases. I'm not currently a Fidelity customer and the previous thread discussing the issue is a bit out of date and the mods asked me to start a new thread (viewtopic.php?f=10&t=151111).

Thanks,
Michael
Here's what I see listed as minimum initial investments for QSPIX and QSPNX at Fidelity:

For QSPIX, minimums are:
IRA: $2,500
Solo401k: $100,000
Taxable: $5,000,000

For QSPNX, minimums are:
IRA: $2,500
Solo401k: $500
Taxable: $1,000,000
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Re: An alternative to alternative investments [QSPIX]

Post by Ketawa »

I bought QSPIX and QSMLX without any trouble today.

On the fund research page, click on the "Fees and Distributions" tab to see the minimum investment amounts for IRAs. There seems to be a minimum initial investment of $2500 with a minimal additional investment of $250 for the AQR funds.

I think my rebalancing strategy will be to add the N share class once I am out of balance for any given fund by $2500, meeting the minimum investment. Then I'll probably shift holdings into the I/L share class once I have about $10,000 in the N share class. Just a guess at what will make the most sense for minimizing my overall transaction fees and losses to higher ER.
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Re: An alternative to alternative investments [QSPIX]

Post by Harpua26 »

Thanks Ketawa. Just to be clear, you purchased these shares for an IRA account or a regular account?
Ketawa wrote:I bought QSPIX and QSMLX without any trouble today.

On the fund research page, click on the "Fees and Distributions" tab to see the minimum investment amounts for IRAs. There seems to be a minimum initial investment of $2500 with a minimal additional investment of $250 for the AQR funds.

I think my rebalancing strategy will be to add the N share class once I am out of balance for any given fund by $2500, meeting the minimum investment. Then I'll probably shift holdings into the I/L share class once I have about $10,000 in the N share class. Just a guess at what will make the most sense for minimizing my overall transaction fees and losses to higher ER.
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Re: An alternative to alternative investments [QSPIX]

Post by Ketawa »

Yes, this is my IRA.
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Re: An alternative to alternative investments [QSPIX]

Post by Robert T »

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For those interested -

Asness at al. (2015) Investing With Style. Journal of Investment Management
“Combining all four style premia [value, momentum, carry, and defensive] into one portfolio effectively doubles the maximum Sharpe ratio obtainable from any single-style strategy.”
As all portfolios in the paper are scaled to have a standard deviation of 10, this can be read as combining all four style premia into one portfolio effectively doubled the return for the same level of volatility than was obtainable from any single strategy.
“In addition, the diversified style portfolio also significantly reduces rare or “tail” risks associated with each individual style.”
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Re: An alternative to alternative investments [QSPIX]

Post by matjen »

Thank you Robert T. for bringing this paper to my attention. I found it very interesting.
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Re: An alternative to alternative investments [QSPIX]

Post by ClosetIndexer »

Random Walker wrote:I feel like people in this thread are looking too much at the behavior of this fund (return, SD, costs) in isolation. What really matters is how it mixes in a portfolio. What a potential addition to a portfolio contributes depends on its returns, volatility, and correlations to other portfolio components. This is an expensive fund, way beyond boglehead norms. But the boglehead way to consider it is as a small % addition to an entire portfolio. The absolute cost then is modest. And the question arises whether the mix with the rest of the portfolio is worth it. For what it's worth, I'm an asset class junkie and am giving it serious consideration.

Dave
Figured it was worth re-emphasizing this point. IMO this is behind most of the fundamental disagreements in this thread. It makes no sense to directly compare the returns of QSPIX to a TSM fund, or indeed to any fund designed to capture beta. What makes far more sense is to compare a portfolio with a small allocation to QSPIX to the same portfolio without it, both in terms of risk and return. It is well known that even an asset with negative return can increase the risk-adjusted return of a portfolio if it provides sufficient diversification. That is the point of this fund.

Or, looking at it another way, "What matters is factor exposures and cost."-Robert T. Both the returns and the cost of this fund certainly matter, but they matter in the context of one's entire portfolio, not in a vacuum. So that's how it should be evaluated; rather than comparing its returns (actual or projected) against some stock market fund, compare the volatility and return of a portfolio without the fund to the same portfolio with a small holding. I would try doing so, except I'm in Canada, so I couldn't buy it anyway. I'll certainly keep an eye on it though.
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Re: An alternative to alternative investments [QSPIX]

Post by Random Walker »

And a small allocation, say <5%, to an expensive fund doesn't increase the overall portfolio expense very much.

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Re: An alternative to alternative investments [QSPIX]

Post by 691175002 »

No particular opinion on their individual products, but I consider AQR some of the smartest guys around.
I've read the majority of their research papers, and they created the Pandas library which is the standard for data analysis in Python.
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Re: An alternative to alternative investments [QSPIX]

Post by comeinvest »

I was wondering if anybody has current information on where QSPIX can be bought, except Fidelity, and what the minimums are for taxable and retirement accounts. The 0.25% p.a. additional fee for QSPNX seems rather marginal given the already high fees, but I'd rather avoid it if possible. It looks like Scottrade has it with a surprisingly low $100 minimum. But I don't like Scottrade, and they don't have some other products that I would like to combine QSPIX with. Any other data points on availability would be appreciated.
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Re: An alternative to alternative investments [QSPIX]

Post by grok87 »

Sammy_M wrote:Anyone know how much leverage the AQR Equity Market Neutral Fund (QMNIX, 1.37% ER) employs? It doesn't include Carry exposure.
looks like it is 2 turns per side leveraged. ie for every dollar you invest it goes 2 dollars long and 2 dollars short
https://funds.aqr.com/our-funds/alterna ... utral-fund
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Re: An alternative to alternative investments [QSPIX]

Post by boga2020a »

Here a good read on tge new breed of alternative funds http://www.wsj.com/articles/SB100014240 ... 4053667514

My take away is that retail alternative fund's performance might be impacted due to customer redemption even under normal market conditions
new funds face a potentially costly problem that most established hedge funds don't: Since the funds are organized as mutual funds, they are required under securities laws to be able to satisfy investor requests to withdraw their money on a daily basis. As a result, they are sometimes known as "liquid-alternative" funds. Some hedge-fund managers are salivating at the chance to profit if these funds must sell assets at a loss to meet investor requests for redemptions. Traditional hedge funds, by contrast, often require investors to commit money for months or years. "Who are they going to sell to? I hope it's us," Paul Westhead, chief executive of Irvine, Calif.-based Rimrock Capital Management, a credit-focused hedge-fund firm
The WSJ article was posted in 2014. I checked some other alt funds , as warned in the article 2 yrs ago, they really sucked REDAX Ramius Event Driven Equity Fund Class A | Marketfield A (MFADX) | Goldman Sachs Multi-Manager Alternatives Fund Class A Shares (MUTF:GMAMX) | Balter L/S Small Cap Equity Fund Institutional Class (MUTF:BEQIX)

But look likes QSPIX is slightly different from the above funds as it is equities, bonds, interest rates, commodities and currencies.
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Re: An alternative to alternative investments [QSPIX]

Post by larryswedroe »

Re leverage, the fund targets a 10% volatility. so it adjusts leverage based on current vol, which is a predictor of future vol. When vol is low the leverage is higher and vice versa, so it's time varying
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Re: An alternative to alternative investments [QSPIX]

Post by mcgarrett »

I had researched this fund to attempt to understand its role within a diversified portfolio, and although I am feeling more knowledgeable in general terms, I have hesitated for two reasons. First, the ER is high relative to my other holdings, and it makes me pause, being a Boglehead at heart. But, more importantly, this type of investment has many aspects ( leverage, currency risk, momentum, carry,…) that I must sheepishly admit are beyond my comfort zone of investment knowledge. I remember reading Larry Swedroe's recommendation to "never invest in anything you don't fully understand", and this fund is in a grey zone.

I had committed to a Swedroe Minimizing Fat Tails portfolio some years ago, and am maintaining this strategy, but i have about 5% of my assets in inflation-protected bond funds that I have periodically wished to part with, but did not because of a lack of good alternatives. But now I am tempted to exchange this allocation to QSPIX going forward. I would appreciate any opinions about how others view this fund and its utility.

Thanks, McGarrett
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Re: An alternative to alternative investments [QSPIX]

Post by lack_ey »

boga2020a wrote:Here a good read on tge new breed of alternative funds http://www.wsj.com/articles/SB100014240 ... 4053667514

My take away is that retail alternative fund's performance might be impacted due to customer redemption even under normal market conditions
new funds face a potentially costly problem that most established hedge funds don't: Since the funds are organized as mutual funds, they are required under securities laws to be able to satisfy investor requests to withdraw their money on a daily basis. As a result, they are sometimes known as "liquid-alternative" funds. Some hedge-fund managers are salivating at the chance to profit if these funds must sell assets at a loss to meet investor requests for redemptions. Traditional hedge funds, by contrast, often require investors to commit money for months or years. "Who are they going to sell to? I hope it's us," Paul Westhead, chief executive of Irvine, Calif.-based Rimrock Capital Management, a credit-focused hedge-fund firm
The WSJ article was posted in 2014. I checked some other alt funds , as warned in the article 2 yrs ago, they really sucked REDAX Ramius Event Driven Equity Fund Class A | Marketfield A (MFADX) | Goldman Sachs Multi-Manager Alternatives Fund Class A Shares (MUTF:GMAMX) | Balter L/S Small Cap Equity Fund Institutional Class (MUTF:BEQIX)

But look likes QSPIX is slightly different from the above funds as it is equities, bonds, interest rates, commodities and currencies.
Consider here that there's a considerable amount of cash, with a lot of the exposure via derivatives. They can meet redemptions via the cash they already have. Yes, there are legitimate concerns about offering daily liquidity to investors for underlying investments that are illiquid and poorly matched for the investment vehicle. The quote is from a credit manager, and sure enough, after the article was posted, there was the whole Third Avenue Focused Credit debacle last year. That probably has more place as a hedge fund or closed-end fund than a mutual fund.

mcgarrett wrote:I had researched this fund to attempt to understand its role within a diversified portfolio, and although I am feeling more knowledgeable in general terms, I have hesitated for two reasons. First, the ER is high relative to my other holdings, and it makes me pause, being a Boglehead at heart. But, more importantly, this type of investment has many aspects ( leverage, currency risk, momentum, carry,…) that I must sheepishly admit are beyond my comfort zone of investment knowledge. I remember reading Larry Swedroe's recommendation to "never invest in anything you don't fully understand", and this fund is in a grey zone.

I had committed to a Swedroe Minimizing Fat Tails portfolio some years ago, and am maintaining this strategy, but i have about 5% of my assets in inflation-protected bond funds that I have periodically wished to part with, but did not because of a lack of good alternatives. But now I am tempted to exchange this allocation to QSPIX going forward. I would appreciate any opinions about how others view this fund and its utility.

Thanks, McGarrett
What have you read and what aren't you familiar with?

The fund's goal is to invest long and short across asset classes in a systematic way to get exposure to four investment styles aka factors in the (expanded) Fama-French tradition, which have historically provided positive returns in the long run. It's positioned to be market neutral. The higher your existing exposure to these factors, the less this would contribute something unique, for better or worse. It's market neutral and as such your existing allocation to stocks, bonds, commodities, or whatever else probably doesn't make that much of a difference.

At a very high level, the draw of any such investment or strategy is to generate returns in a manner that is not dependent on the direction of the markets, to add a not-very-correlated source of returns. You have to believe that there are returns to be had here and that these are worthwhile over just taking more of the cheaper, more conventional exposures available elsewhere.

If you don't think these factors will contribute positive returns over the long run after costs, you should stay away of course. If you believe in other factors more than the ones here, you should pass on it or keep a very low allocation. If you're bigger on value and momentum than carry and defensive and/or don't think that getting exposure via more asset classes helps very much, then you can probably just load on value and momentum in stocks for much cheaper than what you'd be paying here and that may be better. Actually, you can do defensive (low beta) in stocks just as easily too.

The key advantages here are really just
  • High factor density - high exposure per dollar invested, which could be useful if wanting to stuff non-market exposures all into a tax-advantaged account for tax efficiency and more simple/cheaper/tax efficient exposure in taxable, or if going for heavy non-market factor exposures relative to common market beta, term risk, etc.
  • Exposure to factors outside of equities - historically somewhat diversifying compared to just getting everything in stocks, as factors (e.g. value) in stocks are related to those same factors elsewhere but are not perfectly correlated.
  • Exposure to the short side of factors - sometimes there's more juice in the short side than the long side. However, note that the short side exposures here may be offsetting long exposures you have in other funds, at least for some assets, and combining long/short funds with long funds to create underweight long positions is inefficient compared to just underweighting via long-only funds. (Of course, if the short position is high enough or if you're not offsetting with a long position elsewhere, then you are getting an allocation not possible with long-only funds.)
Balance that against
  • Trading costs and high ER (though not that high compared to competitors)
  • Risks, with the leverage amplifying potential problems with black swan events as well as negative skewness (which was even seen in the backtest)
  • High unconventionality -> high tracking error regret; losing money with an unconventional strategy is much tougher to endure and begets more second-guessing than losing money conventionally like in a stock downturn
among other things.
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Re: An alternative to alternative investments [QSPIX]

Post by grok87 »

mcgarrett wrote:I had researched this fund to attempt to understand its role within a diversified portfolio, and although I am feeling more knowledgeable in general terms, I have hesitated for two reasons. First, the ER is high relative to my other holdings, and it makes me pause, being a Boglehead at heart. But, more importantly, this type of investment has many aspects ( leverage, currency risk, momentum, carry,…) that I must sheepishly admit are beyond my comfort zone of investment knowledge. I remember reading Larry Swedroe's recommendation to "never invest in anything you don't fully understand", and this fund is in a grey zone.

I had committed to a Swedroe Minimizing Fat Tails portfolio some years ago, and am maintaining this strategy, but i have about 5% of my assets in inflation-protected bond funds that I have periodically wished to part with, but did not because of a lack of good alternatives. But now I am tempted to exchange this allocation to QSPIX going forward. I would appreciate any opinions about how others view this fund and its utility.

Thanks, McGarrett
well since you mentioned leverage...

it might be good to be aware that there is a less leveraged version of this fund available with ticker QSLIX.
RIP Mr. Bogle.
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Re: An alternative to alternative investments [QSPIX]

Post by larryswedroe »

makes no sense to use the less leveraged one as more expensive, just put in less money into the more leveraged fund
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Re: An alternative to alternative investments [QSPIX]

Post by SpaceCowboy »

How are people currently getting access to QSPIX? I'm unable to add any more funds to my position at Fidelity. Currently at about 3.5% allocation.
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Re: An alternative to alternative investments [QSPIX]

Post by mcgarrett »

Thanks to lack_ey for your detailed response, and to the other responders. A good example of my naiveté about this type of investment is the leverage issue that was mentioned by Grok and Larry. I am unsure how much leverage is too much, and how much risk this results in over time. I also don't know how to estimate whether the low correlation to my other equity holdings will be likely to persist in the future. With my rather high fixed-income allocation, I have used some relatively higher risk equity investments (SCV, EM) to try to gain some return, and in lieu of investing in a hedge fund, QSPIX looked like an option for a modest 5% allocation. Still on the fence, but after reading lack_ey's response, I may be a little less hung up on the ER.

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Re: An alternative to alternative investments [QSPIX]

Post by Ketawa »

rrppve wrote:How are people currently getting access to QSPIX? I'm unable to add any more funds to my position at Fidelity. Currently at about 3.5% allocation.
Fidelity shut down access to QSPIX a while ago. Scottrade also closed off access to all AQR funds sometime this year, I think it was in March. I believe the only option left for a version of this fund is to buy QSPNX at Fidelity for 25 bp extra.

The extra cost didn't matter to me at this point since I was already had a substantial chunk in QSPIX (and other I shares AQR funds) and I was holding N shares for rebalancing purposes. $10k in AQR N shares costs $25 extra per year and allows me to avoid Fidelity's $50 purchase fee on rebalancing.
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Re: An alternative to alternative investments [QSPIX]

Post by grok87 »

larryswedroe wrote:makes no sense to use the less leveraged one as more expensive, just put in less money into the more leveraged fund
Well I understand the argument you are making. The one year performance figures in the links below bear out that argument. For the last 1 year, QSPIX is up 10.65% and QSLIX is up 5.33%. So it looks like QSPIX is just double QSLIX. But QSLIX's fees are 0.79% and QSPIX's fees are 1.48%. So since 1.48% is less than double 0.79%, QSPIX looks to be the cheaper approach.
...
http://performance.morningstar.com/fund ... on?t=QSLIX
...
http://performance.morningstar.com/fund ... on?t=QSpix

But the argument seems to break down a bit when one looks at the YTD figures at 7/8/16. On a year to date basis QSLIX is up 0.96% but QSPIX is up only 0.39%. If the argument is that QSPIX = double QSLIX then QSPIX should be up 1.92% instead of 0.39%. So I as myself: what gives?

To me this drives home the point that I don't really know how these funds work. And also that leverage doesn't always work the way i think it should.
RIP Mr. Bogle.
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Re: An alternative to alternative investments [QSPIX]

Post by lack_ey »

grok87 wrote:
larryswedroe wrote:makes no sense to use the less leveraged one as more expensive, just put in less money into the more leveraged fund
Well I understand the argument you are making. The one year performance figures in the links below bear out that argument. For the last 1 year, QSPIX is up 10.65% and QSLIX is up 5.33%. So it looks like QSPIX is just double QSLIX. But QSLIX's fees are 0.79% and QSPIX's fees are 1.48%. So since 1.48% is less than double 0.79%, QSPIX looks to be the cheaper approach.
...
http://performance.morningstar.com/fund ... on?t=QSLIX
...
http://performance.morningstar.com/fund ... on?t=QSpix

But the argument seems to break down a bit when one looks at the YTD figures at 7/8/16. On a year to date basis QSLIX is up 0.96% but QSPIX is up only 0.39%. If the argument is that QSPIX = double QSLIX then QSPIX should be up 1.92% instead of 0.39%. So I as myself: what gives?

To me this drives home the point that I don't really know how these funds work. And also that leverage doesn't always work the way i think it should.
For what it's worth, he didn't say that returns would be 2x over any given period. That's not how leverage works either here or elsewhere, and you shouldn't ever expect that.

What's true is that the normal version is more volatile and has more long and short exposures, and a little more for the fee charged.
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Re: An alternative to alternative investments [QSPIX]

Post by grok87 »

lack_ey wrote:
grok87 wrote:
larryswedroe wrote:makes no sense to use the less leveraged one as more expensive, just put in less money into the more leveraged fund
Well I understand the argument you are making. The one year performance figures in the links below bear out that argument. For the last 1 year, QSPIX is up 10.65% and QSLIX is up 5.33%. So it looks like QSPIX is just double QSLIX. But QSLIX's fees are 0.79% and QSPIX's fees are 1.48%. So since 1.48% is less than double 0.79%, QSPIX looks to be the cheaper approach.
...
http://performance.morningstar.com/fund ... on?t=QSLIX
...
http://performance.morningstar.com/fund ... on?t=QSpix

But the argument seems to break down a bit when one looks at the YTD figures at 7/8/16. On a year to date basis QSLIX is up 0.96% but QSPIX is up only 0.39%. If the argument is that QSPIX = double QSLIX then QSPIX should be up 1.92% instead of 0.39%. So I as myself: what gives?

To me this drives home the point that I don't really know how these funds work. And also that leverage doesn't always work the way i think it should.
For what it's worth, he didn't say that returns would be 2x over any given period. That's not how leverage works either here or elsewhere, and you shouldn't ever expect that.

What's true is that the normal version is more volatile and has more long and short exposures, and a little more for the fee charged.
i think that's a fair point. But maybe then to rephrase my point, is it fair to say that in the long run the expected return of QSPIX would be twice that of QSLIX (or even slightly more due to the fee issue)?

I honestly don't know the answer to that. But i'm skeptical about it.
RIP Mr. Bogle.
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Re: An alternative to alternative investments [QSPIX]

Post by lack_ey »

grok87 wrote:i think that's a fair point. But maybe then to rephrase my point, is it fair to say that in the long run the expected return of QSPIX would be twice that of QSLIX (or even slightly more due to the fee issue)?

I honestly don't know the answer to that. But i'm skeptical about it.
No, it should probably be a bit lower than double. [edit: less than double the excess return over the risk-free rate, I mean]

In the very least there's the usual issue of leverage rebalancing: you get slippage on average relative to the multiple and it gets worse the more volatile the underlying investment is and the more leverage you use. It's like a much less extreme example of those leveraged ETFs that reset daily: the rebalancing is probably here less often, and the underlying portfolio is less volatile than say the S&P 500.

I don't know if there are additional concerns beyond that at play here.
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Re: An alternative to alternative investments [QSPIX]

Post by protagonist »

I just remembered how excited some people were about this "interesting" fund years ago and, out of curiosity, I checked its long term performance.
In one word, it has been dismal. It has a one star Morningstar rating.
1 year load-adjusted return: -22.14%
5 year load-adjusted return: -5.69%
https://finance.yahoo.com/quote/QSPIX/performance/
QSLIX's losses have been about half as bad, which is still dismal.
Does anybody (including its main advocate, Larry Swedroe) still believe in this thing? And if so, why?
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Re: An alternative to alternative investments [QSPIX]

Post by Angst »

I admit to having traveled down the primrose path that lead to PCRIX and then ultimately QSPIX.

I sold off PCRIX long ago, or at least what seems like probably the better part of 10 years ago. Just this past March I capitulated on QSPIX and turned what was left of it into plain old equity, something like 50/50 VTSAX and VTIAX. I couldn't be happier. I do still hold QSMLX (small cap multi-factor) and have no trouble with that. I have nothing more to confess.

(What, no angel smilies?) :twisted:
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Re: An alternative to alternative investments [QSPIX]

Post by 000 »

And everything that happened in March wasn't enough to give this fund a good boost...

Image

It did fall less than the stock market, but then just kept falling. The chart only shows monthly data, so it masks for example Gold's brief downward volatility in March, but nevertheless QSPIX didn't seem to offer much benefit. It is uncorrelated with the stock market presumably because it is a perpetual loser.

And, what was Swedroe hoping to achieve with a 3% allocation to this fund?
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Re: An alternative to alternative investments [QSPIX]

Post by 000 »

Angst wrote: Wed Oct 28, 2020 9:10 pm I admit to having traveled down the primrose path that lead to PCRIX and then ultimately QSPIX.

I sold off PCRIX long ago, or at least what seems like probably the better part of 10 years ago. Just this past March I capitulated on QSPIX and turned what was left of it into plain old equity, something like 50/50 VTSAX and VTIAX. I couldn't be happier. I do still hold QSMLX (small cap multi-factor) and have no trouble with that. I have nothing more to confess.

(What, no angel smilies?) :twisted:
Confession is necessary, but not sufficient, for absolution.

Reread Common Sense on Mutual Funds, say a few Hail Bogles, and get back to us when you start to feel enlightened again.
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Re: An alternative to alternative investments [QSPIX]

Post by alpenglow »

000 wrote: Wed Oct 28, 2020 10:13 pm It is uncorrelated with the stock market presumably because it is a perpetual loser.
My thought exactly. Glad I dumped this one. Never should have bought it to begin with TBH.
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Re: An alternative to alternative investments [QSPIX]

Post by Chicken Little »

protagonist wrote: Wed Oct 28, 2020 7:43 pmDoes anybody (including its main advocate, Larry Swedroe) still believe in this thing? And if so, why?
I wouldn't be in a rush to write it off categorically. That's speaking in a general sense. I hardly remember the specifics of it, and don't own any of this or any other alternative to bread & butter mutual funds.

I think events have conspired to drive US Large Cap Growth. I don't believe that is necessarily a product of market efficiency. Specifically, without the substantial intervention to support the economy, I'm curious how a fund like this would have responded relative to a S&P 500 Index?

Now, as cases are increasing, if the economy comes under renewed stress and there are market declines that can't be rapidly reversed with fiscal/monetary policy, I definitely wonder how QSPIX and other alternatives will perform.

I guess if I bought in years ago, and held to now, I'd be inclined to let it run out until something like June?
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Re: An alternative to alternative investments [QSPIX]

Post by Random Walker »

I’m still sticking with it. Admittedly, it’s a challenge. The fund invests in value, defensive, momentum, carry across multiple asset classes. These styles have been shown to be profitable in long term data. I don’t think risks change their nature and I believe human behavior is strongly persistent over time as well. 5 years and even 10 years can be too short a time period to evaluate an investment. But like I said, it’s been a challenge. Someone said you’re not adequately diversified if some part of your portfolio isn’t underperforming. I’m giving a lot of weight to that statement in this period dominated by large growth stocks.

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Re: An alternative to alternative investments [QSPIX]

Post by nedsaid »

Random Walker wrote: Thu Oct 29, 2020 8:44 am I’m still sticking with it. Admittedly, it’s a challenge. The fund invests in value, defensive, momentum, carry across multiple asset classes. These styles have been shown to be profitable in long term data. I don’t think risks change their nature and I believe human behavior is strongly persistent over time as well. 5 years and even 10 years can be too short a time period to evaluate an investment. But like I said, it’s been a challenge. Someone said you’re not adequately diversified if some part of your portfolio isn’t underperforming. I’m giving a lot of weight to that statement in this period dominated by large growth stocks.

Dave
Certainly, AQR Style Premia Alternative (QSPIX) has experienced the perfect storm. Last I looked, Large Value funds were down 10 percent for the year and Large Growth funds were up over 20 percent. Small Value was down even more than Large Value. Seeing that QSPIX had taken a bet on Value, you can see why this fund hasn't done well.

You have to look at how your portfolio has done as a whole, my guess is that your Buckingham Portfolio has done remarkably well despite gale force headwinds.
A fool and his money are good for business.
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Re: An alternative to alternative investments [QSPIX]

Post by protagonist »

Random Walker wrote: Thu Oct 29, 2020 8:44 am These styles have been shown to be profitable in long term data.

Dave

Contrary to what so many finance buffs say, "long term data" does not exist in the stock market...at least not long enough to be statistically relevant regarding the intermediate to long-term future.
90-100 years of data may be enough, if past events are predictive of future events, to make general predictions about tomorrow's market. For instance, there were only a handful of days over the past century that the market crashed over 20% in one day. We have enough one day data points to predict (with unknown accuracy) that (if there is any meaningful past correlation with future events, which we don't really know), it probably will not crash tomorrow.
But most of us are not day traders and , as buy and hold investors, we are concerned about a longer term future. For recent retirees that may mean 30 years. For younger investors it may mean 50 or 60 years.
90 years of data is statistically useless in predicting outcomes over the next 30. Statistics obeys symmetry of scale. It is the statistical equivalent of predicting today's (Thursday's) market based on what the market did in the past 3 days (Monday through Wednesday). If we could do that with any accuracy whatsoever we would all be rich. If the market went up 3 days in a row we would buy and if it went down 3 days in a row we would sell. Or if it went up three minutes in a row we would buy the next minute....etc. Or if it didn't rain Monday through Wednesday, I would conclude that I don't need an umbrella today.
Mantra: "The stock market always goes up in the long run." Really? We don't have long term data. We just know that the past century, or maybe even two, has perhaps been the most remarkable in the history of civilization in terms of economic growth (since the industrial revolution). For how long will that continue to be true? 10 years? 50 years? 100 years? 1000 years? A million? And if not forever, when will it cease to be true?
The statistical justifications we read for what we do are all smoke and mirrors. They are not mathematically sound.
I used to teach statistics in college. Admittedly that was a long time ago. But there are many brilliant mathematicians who follow this forum, and I have challenged them over the 10 years that I have been a Bogleheads member to refute this claim with a good statistical argument. To date I have not had one taker. This concept is Statistics 101. I am amazed that so many "finance experts" don't get it.

It's not hard to come up with a good theory of why some new paradigm should work. Just think of how internally consistent the logic behind so many conspiracy theories are. And in many cases, with finance, given such limited data, these theories are easy to justify by looking backwards. Dogs of the Dow, the January boost, stuff like that. I'm not well enough versed in them to rattle off dozens, but I am sure many here can (so many managed funds have been based on them), and yet they all seem to have their day before tanking. In my humble opinion, QSPIX is just another. Could I be wrong? Of course I can. Maybe this is the first paradigm to date that holds water. Maybe it makes sense to you. But I wouldn't keep paying exorbitant management fees while waiting to figure out if I am right or not.
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Re: An alternative to alternative investments [QSPIX]

Post by heyyou »

In the 1990s, there was Fidelity's Magellan fund with a good history.
In the mid-2000s, PCRIX was touted by Larry, with never a suggestion of it being time to sell as my losses kept growing for a decade.
Now there is QSPIX for others to learn the same lesson.

Our wanting more money/more safety is the problem, not the specialized mutual funds which happen to attract our already-tuned attention.
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Re: An alternative to alternative investments [QSPIX]

Post by garlandwhizzer »

protagonist wrote:

It's not hard to come up with a good theory of why some new paradigm should work. Just think of how internally consistent the logic behind so many conspiracy theories are. And in many cases, with finance, given such limited data, these theories are easy to justify by looking backwards. Dogs of the Dow, the January boost, stuff like that. I'm not well enough versed in them to rattle off dozens, but I am sure many here can (so many managed funds have been based on them), and yet they all seem to have their day before tanking. In my humble opinion, QSPIX is just another. Could I be wrong? Of course I can. Maybe this is the first paradigm to date that holds water. Maybe it makes sense to you. But I wouldn't keep paying exorbitant management fees while waiting to figure out if I am right or not.
1+

Factor theory sounds compelling. It provides logical rationales for why it should work and is soundly based on backtesting from 1927 right up until small and value factors were first described starting in 1993. After small and value were described factor model returns began diminishing and continue to do so. Real factor funds including the newer very appealing in theory multi-factor funds have failed to outperform a simple cheap one factor (beta) fund especially so on a risk adjusted basis. Factor adherents argue that we should expect this in SCV and it has happened in the past. What about multi-factor funds which claimed on inception to produce higher expected returns with lower expected risk and volatility? If factors were determining 90+% of all returns, multi-factor should be a slam dunk, load up on multiple factors and get greater returns with wider diversification. It seemed the ticket to much improved risk adjusted returns. The exact opposite has occurred since inception--greater risk, greater volatility, lower returns--for almost all multi-factor funds. I have yet to hear a convincing explanation for this. It's always the same answer: just wait, you'll see, it's going to happen in the future. That's an argument that is impossible to disprove. It may indeed happen or, it may not.

Beta, the market portfolio (TSM ) is not a fixed target. Instead the market adapts and evolves over time. It is entirely possible that the market incorporates and subsumes expected factor premiums into its real time asset pricing. This is a professionally dominated market and 90+% of all stock trades are driven by full time professionals who know all about the factor theory. Today's information economy and efficient markets are very different from those of 1927 -1993 in which the economy was bricks and mortar (PB meant a lot), and small value stocks were almost totally neglected and hence vastly underpriced. There were no SCV funds searching for these stocks during that period and Graham and Buffett easily harvested this vast market inefficiency for outstanding performance. We may not get the same great results from that era going forward in our information based economy and LCG driven markets. Time will tell.

Value has underperformed by so much for so long, especially SCV, that there exists now a huge valuation gulf between SCV and LCG. That suggests that value's future may be better than its past. I personally believe that when the economy recovers SCV and value in general will make up much or all of its lost ground to richly valued LCG. I have no actionable opinion about whether it will produce long term outperformance, especially in a risk adjusted manner.

What is clear is that a certain amount of skepticism is appropriate when an expert tells you what the market is expected to do in the future based on what sounds like a compelling model. The simple truth is that no one knows with reliability which segment of the market is going to outperform over any time frame in the future. Being highly intelligent, very well educated and knowledgeable about economics and financial markets, even having a compelling academic model does not guarantee investing success versus TSM which you can buy for 0.04%/yr and which provide wide diversification and great tax efficiency. Theoretical diversification was in theory increased by multi-factor funds relative to one factor beta, but in reality the opposite happened with real funds. It is best IMO not to assume that real markets are required to do what factor theory predicts they will do in the future.

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Re: An alternative to alternative investments [QSPIX]

Post by nisiprius »

protagonist wrote: Thu Oct 29, 2020 12:27 pmMantra: "The stock market always goes up in the long run." Really? We don't have long term data. We just know that the past century, or maybe even two, has perhaps been the most remarkable in the history of civilization in terms of economic growth (since the industrial revolution). For how long will that continue to be true? 10 years? 50 years? 100 years? 1000 years? A million? And if not forever, when will it cease to be true?
I would add that from 1900 through the present, in 23 national stock markets studied by Dimson & al, two of them went to zero. This is something that is admittedly hard to know how to deal with, but most "no risk in the long run" types simply ignore it. 2 out of 23 is not trivial, not "black swan" territory. If you consider 1900-present to be three forty-year periods, then it implies about a 3% probability of failure in a forty year period, which is greater than the chance of rolling a two with a pair of dice, or having the ball fall into the double zero on a roulette wheel.
The statistical justifications we read for what we do are all smoke and mirrors. They are not mathematically sound.
I used to teach statistics in college. Admittedly that was a long time ago. But there are many brilliant mathematicians who follow this forum, and I have challenged them over the 10 years that I have been a Bogleheads member to refute this claim with a good statistical argument. To date I have not had one taker. This concept is Statistics 101. I am amazed that so many "finance experts" don't get it.
On the one hand, you'd like much more than 100 years of data. Even if you believed that you were dealing with Statistics 101, had a guaranteed-valid model you just need to get values for a few parameters, 100 years of data wouldn't be enough to put any kind of narrow bounds around the values of those parameters. But you have no idea what the underlying model is. And once you get out to even 100 years, the reliability of the data starts to be very questionable... and it also becomes impossible to believe that the stock market of 1871 is so similar to that of 2020 that you should expect them to be quantitatively the same.

And then, of course, there's Mandelbrot's The Misbehavior of Markets. I read it and "the scales fell from my eyes." It's the elephant in the room. Nobody can get around it but nobody wants to deal with it, because (despite his best efforts to do something along those lines) it is really nihilistic. It offers no good way forward. If The Misbehavior of Markets is right, then there really isn't any way to do financial economics.
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Re: An alternative to alternative investments [QSPIX]

Post by nisiprius »

As I write this, the Morningstar star rating for QSPIX is one star.

That means it not only has lost money, but it has seriously underperformed other funds in Morningstar's "multialternative" category.
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Re: An alternative to alternative investments [QSPIX]

Post by protagonist »

nisiprius wrote: Thu Oct 29, 2020 6:56 pm

And then, of course, there's Mandelbrot's The Misbehavior of Markets. I read it and "the scales fell from my eyes." It's the elephant in the room. Nobody can get around it but nobody wants to deal with it, because (despite his best efforts to do something along those lines) it is really nihilistic. It offers no good way forward. If The Misbehavior of Markets is right, then there really isn't any way to do financial economics.
The economy is a complex nonlinear entity. The behavior of complex nonlinear systems is fairly well understood (exquisite sensitivity to initial conditions , adaptability to changing circumstances, symmetry of scale, etc). The only believable theory to explain the future of the economy (as well as the behavior of financial markets) is complexity theory, as per Mandelbrot, one of its leading theoreticians and the father of fractal geometry. When it comes to the behavior of markets, Mandelbrot is far more credible, IMHO, than any economic theorist. Finance buffs would be better off reading James Gleick to get an introduction to chaos theory, or taking a free introduction to complexity offered by the Santa Fe Institute via Complexity Explorer. This is actually a good start: http://necsi.edu/projects/baranger/cce.pdf

Nihilism does not justify pessimism any more than it justifies optimism. We can live with the fact that we have no idea what humans will evolve into, we don't know when or how we will die, or whether it will rain in Philadelphia on Christmas next year. We need to accept the same degree of uncertainty when guessing (emphasizing the word "guessing") where markets will be when we turn 90. Acceptance is not necessarily depressing....depressing is when we think we understand something and it turns out wrong, like when you continue to buy the farm when the market declines based on unsound and untestable hypotheses only to find it continues in a downward spiral for decades (eg Japan). Acceptance of uncertainty can be liberating, and also vaguely actionable (by resisting actions based on false premises and by preparing as well as you can for any possible scenario rather than putting your eggs in one basket because "stocks go up 8%/yr in the long run, and value stocks do even better" , or some such notion). Humility is not a bad thing.
Last edited by protagonist on Thu Oct 29, 2020 9:49 pm, edited 2 times in total.
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Re: An alternative to alternative investments [QSPIX]

Post by 000 »

protagonist wrote: Thu Oct 29, 2020 9:21 pm
nisiprius wrote: Thu Oct 29, 2020 6:56 pm

And then, of course, there's Mandelbrot's The Misbehavior of Markets. I read it and "the scales fell from my eyes." It's the elephant in the room. Nobody can get around it but nobody wants to deal with it, because (despite his best efforts to do something along those lines) it is really nihilistic. It offers no good way forward. If The Misbehavior of Markets is right, then there really isn't any way to do financial economics.
The economy is a complex nonlinear entity. The behavior of complex nonlinear systems is fairly well understood (exquisite sensitivity to initial conditions , adaptability to changing circumstances, symmetry of scale, etc). The only believable theory to explain the future of the economy (as well as the behavior of financial markets) is complexity theory, as per Mandelbrot, one of its leading theoreticians and the father of fractal geometry. When it comes to the behavior of markets, Mandelbrot is far more credible, IMHO, than any economic theorist. Finance buffs would be better off reading James Gleick to get an introduction to chaos theory, or taking a free introduction to complexity offered by the Santa Fe Institute via Complexity Explorer. This is actually a good start: http://necsi.edu/projects/baranger/cce.pdf

Nihilism does not justify pessimism any more than it justifies optimism. We can live with the fact that we have no idea what humans will evolve into, we don't know when or how we will die, or whether it will rain in Philadelphia on Christmas next year. We need to accept the same degree of uncertainty when guessing (emphasizing the word "guessing") where markets will be when we turn 90. Acceptance is not necessarily depressing....depressing is when we think we understand something and it turns out wrong, like when you continue to buy the farm when the market declines based on unsound and untestable hypotheses only to find it continues in a downward spiral for decades (eg Japan). Acceptance of uncertainty can be liberating, and also vaguely actionable (by resisting actions based on false premises and by preparing as well as you can for any possible scenario rather than putting your eggs in one basket because "stocks go up 8%/yr in the long run, and value stocks do even better" , or some such notion). Humility is not a bad thing.
What kind of portfolio does one construct based on these beliefs?
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