Asness - The Small-Firm Effect Is Real, and It’s Spectacular

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
User avatar
Robert T
Posts: 2521
Joined: Tue Feb 27, 2007 9:40 pm
Location: 1, 0.2, 0.4, 0.5
Contact:

Re: Asness - The Small-Firm Effect Is Real, and It’s Spectac

Post by Robert T » Tue Jan 27, 2015 5:50 am

.
CliffA - welcome.

Question - why do cheap stocks (relative to expense stocks) have a positive load to quality (table 7)? Seems to imply lower price-to-book stocks are higher quality stocks. Following the first identity in your QmJ paper - all else being equal, shouldn't higher profitability, higher payout, faster growth, 'safer' stocks have higher price-to-book? i.e. expensive-cheap has higher quality load rather than the reverse?

A factor analysis on the iShares Russell 2000, 2000g, 2000v show an increasing load to QmJ as you move from growth to value
https://www.portfoliovisualizer.com/fac ... ctor=false

And the more 'value tilted' one seems to go the higher the QMJ load - for example the QMJ load on the S&P 600 value = +0.4, on S&P 600 pure value = +0.6. Quality is not the first thing that comes to mind when I think about the S&P600pv, having declined 19% in 2007 and a further 42% in 2008.

Thoughts?

Robert
.

User avatar
nisiprius
Advisory Board
Posts: 36016
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Asness - The Small-Firm Effect Is Real, and It’s Spectac

Post by nisiprius » Tue Jan 27, 2015 8:32 am

I, too, welcome Cliff Asness to the thread. One detail. He assumed that the only reason someone might not catch a Seinfeld reference is youth. Another possibility is, of course, that one didn't watch the show.

I find that the reference is to an episode entitled "The Implant," http://en.wikipedia.org/wiki/The_Implant and that "they're real--and they're spectacular!" is a reference to breasts. Just in case anyone else didn't know, either.

It is very easy to imagine that cultural universals in your personal subculture are more universal than they really are. People never get my Giltert & Sullivan references, for example. (What, never? No, never. What never? Well... hardly ever!). I always figured, you know, people I knew in high school and college knew Gilbert & Sullivan, and so did Isaac Asimov, so surely everyone knows about them.
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.

User avatar
grap0013
Posts: 1881
Joined: Thu Mar 18, 2010 1:24 pm

Re: Asness - The Small-Firm Effect Is Real, and It’s Spectac

Post by grap0013 » Tue Jan 27, 2015 12:32 pm

nisiprius wrote:I, too, welcome Cliff Asness to the thread. One detail. He assumed that the only reason someone might not catch a Seinfeld reference is youth. Another possibility is, of course, that one didn't watch the show.
Impossible. Everybody watched that show.

I too invite Cliff to join the QSPIX thread. I emailed AQR over the weekend inquiring about obtaining year-by-year backtested returns for it. A woman left a very nice message on my cell yesterday stating that she could not give those results out unless I was an "investment professional" or working with one. Maybe I can "backdoor" the returns and ask Larry to ask Cliff to get them and then it will be official. I'm not telling what my "backdoor" reference means. :shock:

Cliff, any help on these QSPIX returns? Thanks!
There are no guarantees, only probabilities.

hafius500
Posts: 217
Joined: Sat Sep 10, 2011 4:31 pm

Re: Asness - The Small-Firm Effect Is Real, and It’s Spectac

Post by hafius500 » Tue Jan 27, 2015 3:00 pm

Ketawa wrote:
Leeraar wrote:
CliffA wrote:Oh, and while I won't address a specific product in depth (I get yelled at for that!), some of the turnover numbers above seem very odd and way too large. They are affected by inflows, especially when the funds are smaller, and how a fund like ours equitizes inflows - they are not regular, steady state turnover in the normal sense. Nobody would deny (and our papers, as cited above by others, show) that giving momentum a bigger role will raise turnover, but we don't think it's close to as much as quoted above (and, obviously, we believe it will raise net returns, not just gross returns, over the long-term).
Did I just learn that I don't know something I thought I knew?

I assumed "turnover" is independent of inflows and outflows. No?
The turnover numbers come from the September 2014 Annual Report, pages 172-175.

I also assumed that inflows and outflows would not affect the reported turnover. Here is how the SEC says to calculate turnover. It appears to be based on total assets, so inflows and outflows would have a large effect. Paragraph 13.(a).4.(d) here: http://www.sec.gov/about/forms/formn-1a.pdf
(d) Calculate the Portfolio Turnover Rate as follows:
(i) Divide the lesser of amounts of purchases or sales of portfolio securities for the fiscal year by the monthly average of the value of the portfolio securities owned by the Fund during the fiscal year. Calculate the monthly average by totaling the values of portfolio securities as of the beginning and end of the first month of the fiscal year and as of the end of each of the succeeding 11 months and dividing the sum by 13.
(ii) Exclude from both the numerator and the denominator amounts relating to all securities, including options, whose maturities or expiration dates at the time of acquisition were one year or less. Include all long-term securities, including long-term U.S. Government securities. Purchases include any cash paid upon the conversion of one portfolio security into another and the cost of rights or warrants. Sales include net proceeds of the sale of rights and warrants and net proceeds of portfolio securities that have been called or for which payment has been made through redemption or maturity.
(iii) If the Fund acquired the assets of another investment company or of a personal holding company in exchange for its own shares during the fiscal year in a purchase‑of‑assets transaction, exclude the value of securities acquired from purchases and securities sold from sales to realign the Fund’s portfolio. Adjust the denominator of the portfolio turnover computation to reflect these excluded purchases and sales and disclose them in a footnote.
(iv) Include in purchases and sales any short sales that the Fund intends to maintain for more than one year and put and call options with expiration dates more than one year from the date of acquisition. Include proceeds from a short sale in the value of the portfolio securities sold during the period; include the cost of covering a short sale in the value of portfolio securities purchased during the period. Include premiums paid to purchase options in the value of portfolio securities purchased during the reporting period; include premiums received from the sale of options in the value of the portfolio securities sold during the period.
I don't know how the portfolio turnover rate is calculated in the UK, but it seems the turnover rate can become negative:
Which is just as well since minimizing portfolio turnover remains one of our objectives and this was again achieved with a negative turnover rate of -8,4% during the period. Negative turnover occurs because the method of calculating turnover excludes flows into and out of the Fund, otherwise a newly established fund would automatically have 100% or more turnover. However, it is not very helpful in judging our activities. It is perhaps more helpful to know that we spent a total of £98,081 or just 0.005% (0,5 bps) of the Fund on voluntary dealing.
(page 5, Emphasis added)

Source: The Fundsmith Equity Fund - View: Annual Letter 2014
https://www.fundsmith.co.uk/Home.aspx
prior username: hafis50

Angst
Posts: 1752
Joined: Sat Jun 09, 2007 11:31 am

Re: Asness - The Small-Firm Effect Is Real, and It’s Spectac

Post by Angst » Tue Jan 27, 2015 6:58 pm

All I can say is that the recent blizzard of factor proliferation has made me cold and shrunk my enthusiasm for factor tilts.

robert88
Posts: 366
Joined: Tue Nov 25, 2014 6:27 pm

Re: Asness - The Small-Firm Effect Is Real, and It’s Spectac

Post by robert88 » Tue Jan 27, 2015 7:39 pm

What I would love to know, although I don't really expect Mr. Asness to answer, is how many factors are used in his hedge funds' models. Presumably, he hires legions of Phds so that they can discover new factors, which he then keeps proprietary.

bs010101
Posts: 284
Joined: Thu Feb 13, 2014 12:08 pm

Re: Asness - The Small-Firm Effect Is Real, and It’s Spectac

Post by bs010101 » Tue Jan 27, 2015 7:56 pm

Angst wrote:All I can say is that the recent blizzard of factor proliferation has made me cold and shrunk my enthusiasm for factor tilts.
Is that also a Seinfeld reference? (Were you in the pool?)
robert88 wrote:What I would love to know, although I don't really expect Mr. Asness to answer, is how many factors are used in his hedge funds' models. Presumably, he hires legions of Phds so that they can discover new factors, which he then keeps proprietary.
Not so secret. Here is a good place to start:

https://www.aqr.com/library/journal-art ... with-style

robert88
Posts: 366
Joined: Tue Nov 25, 2014 6:27 pm

Re: Asness - The Small-Firm Effect Is Real, and It’s Spectac

Post by robert88 » Tue Jan 27, 2015 8:16 pm

bs010101 wrote:
robert88 wrote:What I would love to know, although I don't really expect Mr. Asness to answer, is how many factors are used in his hedge funds' models. Presumably, he hires legions of Phds so that they can discover new factors, which he then keeps proprietary.
Not so secret. Here is a good place to start:

https://www.aqr.com/library/journal-art ... with-style
I don't see anywhere in that paper, unless I missed something, where he claims that is how his hedge funds are invested, much less that those are the only factors that his hedge funds use.

User avatar
Ketawa
Posts: 1921
Joined: Mon Aug 22, 2011 1:11 am
Location: DC

Re: Asness - The Small-Firm Effect Is Real, and It’s Spectac

Post by Ketawa » Tue Jan 27, 2015 10:09 pm

robert88 wrote:
bs010101 wrote:
robert88 wrote:What I would love to know, although I don't really expect Mr. Asness to answer, is how many factors are used in his hedge funds' models. Presumably, he hires legions of Phds so that they can discover new factors, which he then keeps proprietary.
Not so secret. Here is a good place to start:

https://www.aqr.com/library/journal-art ... with-style
I don't see anywhere in that paper, unless I missed something, where he claims that is how his hedge funds are invested, much less that those are the only factors that his hedge funds use.
AQR's funds are not hedge funds. They are mutual funds registered with the SEC.

It's not a secret. QSPIX is the subject of a long thread on the forum. Read its fact sheet and Larry Swedroe's blog post linked in the first post.

cb474
Posts: 801
Joined: Tue Jan 19, 2010 6:32 am

Re: Asness - The Small-Firm Effect Is Real, and It’s Spectac

Post by cb474 » Tue Jan 27, 2015 10:27 pm

jdilla1107 wrote:
Robert T wrote:.
Since the inception of the Bridgeway fund BRSIX 7/31/1997 - 12/31/2014 - annualized return

11.8% = CRSP10 (Benchmark for BRSIX)
11.5% = Brirdgeway Ultra-small Co. Mkt (BRSIX)
10.0% = DFA US Microcap (DFSCX)
8.6% = Vanguard Small Cap Index (NAESX)
6.4% = Vanguard 500 (VFINX)

http://quotes.morningstar.com/chart/fun ... A%5B%5D%7D
.
Did you try any other time periods? 10 years looks pretty bad for BRSIX.
Yes, it looks like almost all of that outperformance came from a couple years of time from late 2000 to early 2003, when other small funds were dropping while BRISX went up. Eliminate that period and the performance is not so striking and seems to correlate more with other small funds. I guess there's no arguing that there's some diversification benefit, but i don't know that I would count on the outperformance.

*
Robert T wrote:.
CRSP Decile Annualized Return: 89 years to June 2014 - from Bridgeway annual report
From largest decile to smallest decile

.9.36% CRSP1
10.73%
11.04%
11.14%
11.68%
11.57%
11.73%
11.78%
11.73%
13.36% CRSP10

Seems to be some size effect - over the long-term - so far. BRSIX tracks CRSP10, has lagged by only 0.3% on an annualized basis since inception, although with large annual tracking error. Obviously no guarantees.
I'm worried I'll have to wait 89 years for the benefit to show up.

(Seems to be more or less confirmed above, by ScottW with a quote from SmallHi: viewtopic.php?f=10&t=156421#p2349936.)

I believe that the microcap effect is real. But I'm less convinced about how actionable this insight is in real world investment options and in one's lifetime.
Last edited by cb474 on Wed Jan 28, 2015 1:10 am, edited 2 times in total.

robert88
Posts: 366
Joined: Tue Nov 25, 2014 6:27 pm

Re: Asness - The Small-Firm Effect Is Real, and It’s Spectac

Post by robert88 » Tue Jan 27, 2015 11:28 pm

Ketawa wrote: AQR's funds are not hedge funds. They are mutual funds registered with the SEC.
not true

User avatar
Ketawa
Posts: 1921
Joined: Mon Aug 22, 2011 1:11 am
Location: DC

Re: Asness - The Small-Firm Effect Is Real, and It’s Spectac

Post by Ketawa » Wed Jan 28, 2015 12:43 pm

robert88 wrote:
Ketawa wrote: AQR's funds are not hedge funds. They are mutual funds registered with the SEC.
not true
Here's a link... http://www.sec.gov/cgi-bin/browse-edgar ... getcompany

robert88
Posts: 366
Joined: Tue Nov 25, 2014 6:27 pm

Re: Asness - The Small-Firm Effect Is Real, and It’s Spectac

Post by robert88 » Thu Jan 29, 2015 10:10 pm

Ketawa wrote:
robert88 wrote:
Ketawa wrote: AQR's funds are not hedge funds. They are mutual funds registered with the SEC.
not true
Here's a link... http://www.sec.gov/cgi-bin/browse-edgar ... getcompany
AQR does run and operate hedge funds in addition to its mutual funds.

Post Reply