QSPIX - thoughts on interesting fund

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Yesterdaysnews
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QSPIX - thoughts on interesting fund

Post by Yesterdaysnews » Sat Jun 06, 2015 12:59 pm

While expensive, this fund is supposed to not correlate much with stock market. Swedroe seemed to like it.

You can get into this fund in a Fido IRA for $2500 minimum. otherwise $5 M minimum in taxable account.

I am considering allocation of my IRA to this.

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Re: QSPIX - thoughts on interesting fund

Post by iceport » Sat Jun 06, 2015 1:23 pm

AQR Style Premia Alternative (QSPIX) ER=1.50%?

As discussed previously (currently at 320 posts): An alternative to alternative investments [QSPIX]
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Re: QSPIX - thoughts on interesting fund

Post by Yesterdaysnews » Sat Jun 06, 2015 1:26 pm

It may be worth the cost if it really can provide low correlation to the stock market. Being diversified is a really nice feeling and reduces stress regarding the movement of the stock market. Anything that can provide good returns without correlation to the stock market is of interest to me.

My IRA is about 21.5% of my total investable assets. I already have 20% in a private equity deal. I like to diversify and aim for low correlations.

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Re: QSPIX - thoughts on interesting fund

Post by nisiprius » Sat Jun 06, 2015 1:29 pm

Wow, AQR seems to be the hot new trend. It used to be DFA, DFA, DFA... now all I hear about is AQR, AQR, AQR... I have the feeling that something happened and I didn't get the memo...
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Re: QSPIX - thoughts on interesting fund

Post by lack_ey » Sat Jun 06, 2015 1:41 pm

nisiprius wrote:Wow, AQR seems to be the hot new trend. It used to be DFA, DFA, DFA... now all I hear about is AQR, AQR, AQR... I have the feeling that something happened and I didn't get the memo...

I know, right. I don't think AQR's done mutual funds but for a few/several yearas and these days seem to be regularly launching new stuff and churning out papers and opinion pieces like a machine. That's probably part of it.

Interestingly enough, they're both headed by (multiple) U of Chicago grads who did research under one Eugene Fama.

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Re: QSPIX - thoughts on interesting fund

Post by Random Walker » Sat Jun 06, 2015 2:07 pm

I too have climbed on the QSPIX bandwagon. I'm a big believer in looking at the portfolio as a whole and I hugely influenced by Gibson's Asset Allocation. How an additional fund impacts a portfolio depends on expected return, volatility, correlations, and costs. I've admittedly become an asset class junkie. That being said, I really like the idea of a small allocation to a highly volatile and weakly correlated asset class. The allocation will have a more significant diversification effect on the portfolio than one would expect from such a small %. And the absolute increase in portfolio cost is not all that much when the % allocation is small. I've held 3% allocation to CCFS for about a year and 3% QSPIX for about 6 months. It's intriguing to see the daily moves in these funds compared to the overall market.
Gibson comments that for an investor with an aggressive equity rich portfolio, maximal diversification across asset classes with high expected return can lend strength to the investor's conviction to stick with the plan. I agree. Admittedly, high costs can also make one consistently question the plan. I have to say, QSPIX, CCFs, international small value, REITs, International REITS are what provide me the entertainment in my portfolio. :-). QSPIX should only be held in tax deferred accounts.

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Re: QSPIX - thoughts on interesting fund

Post by Random Walker » Sat Jun 06, 2015 2:15 pm

I also own the fund through Fidelity 401K. AQR says they cap the ER @ 1.5% but I'm not sure if it works out this way in the 401K. It's surprising how hard it can be to definitively figure out the ER within the Fidelity account.

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Re: QSPIX - thoughts on interesting fund

Post by nisiprius » Sat Jun 06, 2015 2:22 pm

Random Walker wrote:I also own the fund through Fidelity 401K. AQR says they cap the ER @ 1.5% but I'm not sure if it works out this way in the 401K. It's surprising how hard it can be to definitively figure out the ER within the Fidelity account.

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Re: QSPIX - thoughts on interesting fund

Post by nedsaid » Sat Jun 06, 2015 4:14 pm

nisiprius wrote:Wow, AQR seems to be the hot new trend. It used to be DFA, DFA, DFA... now all I hear about is AQR, AQR, AQR... I have the feeling that something happened and I didn't get the memo...


I think it hit the spam filter. ;o)
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Re: QSPIX - thoughts on interesting fund

Post by Yesterdaysnews » Sat Jun 06, 2015 5:04 pm

Do reits really offer much diversification from the stock market? Seems they are correlated more or less. This fund is supposed to offer reduced correlation which I think may be worth paying for long term. I don't see much point to "diversification" of asset classes if they are highly correlated when it matters.

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Re: QSPIX - thoughts on interesting fund

Post by lack_ey » Sat Jun 06, 2015 5:17 pm

Yesterdaysnews wrote:Do reits really offer much diversification from the stock market? Seems they are correlated more or less. This fund is supposed to offer reduced correlation which I think may be worth paying for long term. I don't see much point to "diversification" of asset classes if they are highly correlated when it matters.

I think people were a lot higher on different stock sectors and styles potentially offering diversification in the 2000s and less so after the financial crisis. REITs did just fine in the tech collapse but terribly in the financial crisis. Almost nothing worked in 2008-2009 but high-quality bonds and gold.

REITs behave moderately differently from the broad market under many conditions. But even correlations aside, I'm not convinced the long-term returns, which have coincidentally been similar to that of the broad market, will necessarily be the same over the long run from here on out.

Diversification is about more than doing different things during crashes, though. Even with high correlation, if one asset returns 6% and the other 1% but you don't know which one is going to have which long-term trend growth, there is value in having both.


Anyway, institutional investors have long looked for alternate investments with lower correlations, frequently with poor results, sometimes with good ones. This is not much different from what some particular hedge fund might offer (I think it was offered in such a format before being opened as a mutual fund), except with a less ridiculous (but still high) fee, the ability to get your money out in a reasonable fashion, and actually being hedged in some important senses.

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Re: QSPIX - thoughts on interesting fund

Post by Yesterdaysnews » Sat Jun 06, 2015 5:34 pm

The liquidity aspect of this fund should also not be overlooked. My PE investment is very illiquid which is something that makes me fairly uncomfortable in general as I prefer control. This fund allows liquidity within alternative investment sphere.

But it's definitely expensive.

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Re: QSPIX - thoughts on interesting fund

Post by Random Walker » Sat Jun 06, 2015 6:07 pm

In the 6 months I've been following QSPIX it and the market have definitely zagged and zagged very differently day to day FWIW :-)

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Re: QSPIX - thoughts on interesting fund

Post by pkcrafter » Sat Jun 06, 2015 6:48 pm

How in the world do investors on Bogleheads begin to think a fund with an ER of 1.5% is a great choice.

Answer, they are listening to the never-ending promotion of AQR by, uh, AQR.

:oops:
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Re: QSPIX - thoughts on interesting fund

Post by matjen » Sat Jun 06, 2015 7:22 pm

pkcrafter wrote:How in the world do investors on Bogleheads begin to think a fund with an ER of 1.5% is a great choice.

Answer, they are listening to the never-ending promotion of AQR by, uh, AQR.

:oops:


The alternative answer would be the detailed posts by Robert T., Larry Swedroe, and ClosetIndexer found in the lengthy thread already mentioned. Here is a good summary from ClosetIndexer:

"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."


Another alternative is its performance. Even though this isn't the purpose of the fund as ClosetIndexer mentions, the fact it is beating Vanguard's Market Neutral handily and even a pure beta fund like Vanguard's Total World is nice to bring up in threads like this. :mrgreen:

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Re: QSPIX - thoughts on interesting fund

Post by lack_ey » Sat Jun 06, 2015 7:23 pm

If it performs anything close to as advertised, even just by modern portfolio theory, you should probably include an allocation, despite the cost.

A hypothetical asset X with 0 correlation with stocks and bonds that returned on average 3% a year with 10% standard deviation would be worthwhile if it existed. You'd use some of it. Instead of say 60/40 stocks/bonds, you might be something like 55/30/15 stocks/bonds/X or however it comes out (just eyeballing and guessing at the numbers). Now, if the return is 3% instead of 4.5% because they charge 1.5% and you can't get the same thing anywhere else, then that's the price you have to pay. Note that 3% is a figure pulled from thin air; historically the number is larger even before expenses. 10% standard deviation is their target, which they've been able to roughly hit, though no guarantees there either.

The argument should not be about the price so much as the other assumptions, including the returns, the risks (which are not fully encapsulated by a single measure like standard deviation), and so on. If you're like me and don't really have a well-reasoned opinion about what the returns and behavior is likely to look like, then you may not be in a good position to criticize anybody's AA. On the other hand, I'm not quite convinced everyone investing in this and other products can really articulate all of that themselves.

When you look at most categories, you have to balance asset class exposure, diversification, and price. All things equal, you want to pay less. I'm unaware of anything else offering remotely the same exposures, for better or worse. As such, they can charge a bunch and make out like bandits, and at least some people will pay for the privilege.

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Re: QSPIX - thoughts on interesting fund

Post by Five Scoop » Sat Jun 06, 2015 7:36 pm

Well, the fund does get a lot of attention on the forum. The danger here is that a prominent poster such as Larry Swedroe wrote a piece about this fund a while ago. That, unfortunately, gives it credibility. Then there are threads about articles written by Asness to support the AQR funds and their investing strategies. People seem to lose sight of the fact that Asness may be writing articles supporting his investing strategies in order for people to have a reason to invest in his funds. I think anybody who posts about the merits of these alternative investing strategies is fooling themselves into believing they have a deep understanding of the investing strategy and risks involved with these funds. In reality, this is akin to someone reading about how to perform an appendectomy and believing they are competent to perform the surgery.

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Re: QSPIX - thoughts on interesting fund

Post by matjen » Sat Jun 06, 2015 8:15 pm

Five Scoop wrote:Well, the fund does get a lot of attention on the forum. The danger here is that a prominent poster such as Larry Swedroe wrote a piece about this fund a while ago. That, unfortunately, gives it credibility. Then there are threads about articles written by Asness to support the AQR funds and their investing strategies. People seem to lose sight of the fact that Asness may be writing articles supporting his investing strategies in order for people to have a reason to invest in his funds. I think anybody who posts about the merits of these alternative investing strategies is fooling themselves into believing they have a deep understanding of the investing strategy and risks involved with these funds. In reality, this is akin to someone reading about how to perform an appendectomy and believing they are competent to perform the surgery.


And this makes up roughly 25% of Vanguard's Total Bond which is constantly pushed by members of this forum for the "simple" 3-Fund Portfolio. So roughly 10% of a 60/40 portfolio. QSPIX makes up 5% of my portfolio and I don't think anyone has more than 10% on this board FWIW. I doubt many understand these elements of their holdings as well.

Securitized
Agency MBS Pass-Through 18.15
Agency MBS ARM 0.03
Agency MBS CMO 1.24
Non-Agency Residential MBS 0.49
Commercial MBS 2.19
Asset-Backed 0.68

We pay Vanguard and/or AQR to manage these risks based upon their reputations, knowledge, and performance. I do my best to understand it all entirely but would be less than honest of I claimed to understand all the intricacies. I read everything I can and watch any presentations on QSPIX. I don't have a finance MBA however so...
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Re: QSPIX - thoughts on interesting fund

Post by lack_ey » Sat Jun 06, 2015 8:29 pm

matjen wrote:
Five Scoop wrote:Well, the fund does get a lot of attention on the forum. The danger here is that a prominent poster such as Larry Swedroe wrote a piece about this fund a while ago. That, unfortunately, gives it credibility. Then there are threads about articles written by Asness to support the AQR funds and their investing strategies. People seem to lose sight of the fact that Asness may be writing articles supporting his investing strategies in order for people to have a reason to invest in his funds. I think anybody who posts about the merits of these alternative investing strategies is fooling themselves into believing they have a deep understanding of the investing strategy and risks involved with these funds. In reality, this is akin to someone reading about how to perform an appendectomy and believing they are competent to perform the surgery.


And this makes up roughly 25% of Vanguard's Total Bond which is constantly pushed by members of this forum for the "simple" 3-Fund Portfolio. So roughly 10% of a 60/40 portfolio. QSPIX makes up 5% of my portfolio and I don't think anyone has more than 10% on this board FWIW. I doubt many understand these elements of their holdings as well.

Securitized
Agency MBS Pass-Through 18.15
Agency MBS ARM 0.03
Agency MBS CMO 1.24
Non-Agency Residential MBS 0.49
Commercial MBS 2.19
Asset-Backed 0.68

We pay Vanguard and/or AQR to manage these risks based upon their reputations, knowledge, and performance. I do my best to understand it all entirely but would be less than honest of I claimed to understand all the intricacies. I read everything I can and watch any presentations on QSPIX. I don't have a finance MBA however so...

This is not at all a fair comparison because these sources of risk and return have to do mostly with term risk and are priced in by the market. The way these make money is by underlying repayment of debt at agreed-upon rates.

The style premia alternative fund requires continued persistence of outperformance of these styles (value, momentum, carry, defensive) at a level that survives the fees charged by the manager and all the transaction costs, including that of shorting and all the leverage. Before investing, one should probably read and understand a lot of the literature on these investment styles by academics unaffiliated with AQR. Note that a lot of these have both behavioral and risk-based explanations, so different people will feel differently about these.

It's basically just long-short pure factor investing across asset classes, so all the usual arguments about factor zoos and concerns about future conditions are relevant.

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Re: QSPIX - thoughts on interesting fund

Post by matjen » Sat Jun 06, 2015 8:33 pm

lack_ey wrote:[
This is not at all a fair comparison because these sources of risk and return have to do mostly with term risk and are priced in by the market. The way these make money is by underlying repayment of debt at agreed-upon rates.


Agree. I am in no way saying the risks or returns are the same. I am saying that most retail investors who invest in total bond don't have a solid understanding of roughly 25% of its portfolio.
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Re: QSPIX - thoughts on interesting fund

Post by nisiprius » Sat Jun 06, 2015 9:03 pm

matjen wrote:We pay Vanguard and/or AQR to manage these risks based upon their reputations, knowledge, and performance.
I don't pay Vanguard to do that. I pay Vanguard to track a famous index.

I don't expect Vanguard to underweight or overweight the proportions of various kinds of bonds in the fund, or calculate correlation coefficients and do factor analysis among its components, or time their entry into and out of bond asset classes.

I don't expect Vanguard to "manage risks" at all (beyond being able to meet redemptions, avoid index tracking error, etc.) I expect to be exposed to the raw risks of the bond market--the investment grade, US dollar-denominated, fixed-rate taxable bond market. I expect Vanguard to pass these risks through to me faithfully, not try to insulate or protect me against them, or cancel them out through cunning combinations of long and short positions.

Vanguard Total Bond has low risk because it is a big old long-only portfolio of low-risk assets. I don't think need to understand it in great detail. I don't think need to understand much more than that it has an average credit quality of AA and a duration of 5.62 years. I"m not relying on some pattern of mutual movement of corporate bonds vis-a-vis Treasuries or anything like that.
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Re: QSPIX - thoughts on interesting fund

Post by matjen » Sat Jun 06, 2015 9:14 pm

nisiprius wrote:
matjen wrote:We pay Vanguard and/or AQR to manage these risks based upon their reputations, knowledge, and performance.
I don't pay Vanguard to do that. I pay Vanguard to track a famous index.

I don't expect Vanguard to underweight or overweight the proportions of various kinds of bonds in the fund, or calculate correlation coefficients and do factor analysis among its components, or time their entry into and out of bond asset classes.

I don't expect Vanguard to "manage risks" at all (beyond being able to meet redemptions, avoid index tracking error, etc.) I expect to be exposed to the raw risks of the bond market--the investment grade, US dollar-denominated, fixed-rate taxable bond market. I expect Vanguard to pass these risks through to me faithfully, not try to insulate or protect me against them.

Vanguard Total Bond has low risk because it is a big old long-only portfolio of low-risk assets. I don't need to understand it in great detail.


Fair enough and absolutely true. I guess I shouldn't have added that sentence since it does sound like I am saying that what AQR does with QSPIX and Vanguard with Total Bond are similar (when pulled out of context of the total post). I was really trying to point out that most retail investors don't fully understand the entirety of their holdings and QSPIX is not the exception IMO. So in response to you Nisi I will leave Vanguard out of it and claim that most retail investors don't fully understand roughly 25% of a "famous" index. :wink:
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Re: QSPIX - thoughts on interesting fund

Post by Yesterdaysnews » Sat Jun 06, 2015 10:13 pm

I'm curious if anyone knows of funds which has very low correlation to stocks and bonds but suitable for a taxable account?

It appears this QSPIX does in fact derive it's returns not from stocks or bonds but does so in a very tax inefficient manner. Perhaps it is impossible to have such a fund which is suitable for taxable investing?

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Re: QSPIX - thoughts on interesting fund

Post by lack_ey » Sat Jun 06, 2015 10:46 pm

Yesterdaysnews wrote:I'm curious if anyone knows of funds which has very low correlation to stocks and bonds but suitable for a taxable account?

It appears this QSPIX does in fact derive it's returns not from stocks or bonds but does so in a very tax inefficient manner. Perhaps it is impossible to have such a fund which is suitable for taxable investing?

To be clear, the fund invests in stocks, stock indexes, and bonds, among other things, but is generally net hedged (i.e. long-short with positions offsetting) so as to attempt to have low, close-to-0 correlation to a long position in assets it invests in, including stocks, bonds, and commodities.

Yes, the style premia fund is a lot worse in a taxable account. It has a lot of turnover to try to chase those four investment styles. Commodities (including precious metals) have low correlation to stocks and bonds but are also tax inefficient for the higher tax brackets and combine high volatility with low returns. Cash has low correlation to stocks and bonds but doesn't earn much.

I'm definitely not an expert, but I can't think of a hedged alternatives-type investment (e.g. equity market neutral, managed futures) that is implemented in a tax efficient manner.

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Re: QSPIX - thoughts on interesting fund

Post by Maynard F. Speer » Sat Jun 06, 2015 11:18 pm

As other have said, funds like this have to be seen in the context of a diversified portfolio .. Having something that can produce an absolute or market-neutral return can improve almost any portfolio's risk-adjusted returns .. There's a reason big institutional funds, like Yale and Harvard, devote as much as 25% to strategies like these

While largely misunderstood by the media, I certainly think with high valuations, and poor predicted returns, in almost every conventional asset class today, it makes a lot of sense that retail investors might want to consider alternatives and more non-correlated investments (it's cash these funds are a real alternative to)

I think one of the difficulties is the message about fund fees and passive investing has taken so long to sink in, it's now difficult for some to consider investments that may play a different role in a portfolio .. An absolute return doesn't have to be a market-beating return to improve efficiency .. If investors couldn't make a positive return in markets, then index funds wouldn't either .. The aim of these funds is principally to diversify returns - and these were about the only investments that made positive returns through 2008-09
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Re: QSPIX - thoughts on interesting fund

Post by longinvest » Sun Jun 07, 2015 5:50 am

Active management at its best! With such a management fee, QSPIX fund is guaranteed to make a lot of money... for AQR. :oops:
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Re: QSPIX - thoughts on interesting fund

Post by tarheel » Sun Jun 07, 2015 6:08 am

I think I am one of those with a larger allocation to QSPIX (6.5% of total portfolio, increasing to 10% over the long term).

Couple of thoughts:

1. I don't invest with DFA because I can't access the funds. I have a Fidelity 401(k) which means I can go AQR, and I do. If I had access to DFA, I would have a lot more work to do. :) I would say as a whole, those of us that invest with AQR have plenty of respect for DFA too - I invest my daughter's Utah 529 with them.

2. Totally agree with Speer and others above - YOU MUST LOOK AT YOUR FUNDS IN THE CONTEXT OF YOUR PORTFOLIO. QSPIX offers highly unique diversification/low correlation to a stock/bond portfolio. Plenty of people have already explained how and why.

3. Once again, we have the normal Boglehead split:

A) Fees are more or less the only things that matter, and you are CRAZY for paying 1.5% for anything! I don't care!
B) If a fund is actually worth it with respect to my portfolio/financial goals, based on the science of investing, I will pay it. Of course *no guarantees*.

For what it is worth, I've actually lost a bit of money with QSPIX since I bought in earlier this year, and I want to INCREASE my allocation going forward.

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Re: QSPIX - thoughts on interesting fund

Post by packer16 » Sun Jun 07, 2015 6:54 am

I believe and have seen active management work better than the market but am very skeptical of this "alternative" fund. In the past active managers have outperformed by being contrarian and correct, primarily in stock selection. This is simple and how the market works. When managers have been constrained by diversification, funds flows and higher fees they have struggled to outperform the indicies. What I find interesting is that some folks that would dismiss stock selection out of hand would buy this fund with higher fees. They are both doing the same thing, makes bets on being different that the market in hopes of doing better. I just think that stock selection is an easier process to understand because you are dealing with fundamental factor that can be measured (value) which can be compared to a price versus this alternative fund which I think is based upon future correlations and returns which in my book are unknowable and how do you know when to buy/sell factors (?). IMO the more complex the fund gets in terms of factor bets the worse it gets in terms of unknowables. At least with stock selection, if you find an undervalued security you can be pretty much be assured that within 3 to 5 years the value be realized and you have a benchmark to measure the value.

I also thought one the advantages of factors was there lower cost implementation versus active strategies. With this fund this concept is turned on it head. If you had this alternative a reasonable fee (around 50bp) then it may be worth it to see if the creators may have found some kind of special sauce. I think Vanguard has a fund like this that focuses on factors in hedged or risk neutral way (like valuation, momentum and quality) with modest fees (0.25%), Vanguard Market Neutral. I am surprised that other have not looked at this and compared it to QSPIX. Some have said that QSPIX provides exposure to other risk factors (like currency and shorting) but is it worth the incremental 125bp? (BTW you can also get long exposure to the most persistent factors for dirt cheap prices at Vanguard also with Vanguard SCV).

I also struggle to see how an individual or an institution can really use this. I agree with nisiprius give me risk at the lowest cost and let me figure out how to combine it to meet my needs. In most cases if others try to manage volatility for me it comes at a cost, here it is 150bp per yr. IMO the easiest way to do this is to hold a 3 to 5 year of expenses (longer if you are more risk averse) in something safe like ST bonds or CDs and the rest in some assets where you will get rewarded to take volatility like equities or real estate. This fund IMO is trying to finesse volatility at a steep price. If you like this type of fund Vanguard Market Neutral all the way.

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Re: QSPIX - thoughts on interesting fund

Post by matjen » Sun Jun 07, 2015 7:07 am

packer16 wrote: I think Vanguard has a fund like this that focuses on factors (like valuation, momentum and quality) with modest fees (0.25%), Vanguard Market Neutral. I am surprised that other have not looked at this and compared it to QSPIX.


Packer16 I compared it to Vanguard's Market Neutral just a handful of posts above this. Look for the Morningstar image...the one where QSPIX is crushing Market Netural. VMNFX. ;-)

"Another alternative is its performance. Even though this isn't the purpose of the fund as ClosetIndexer mentions, the fact it is beating Vanguard's Market Neutral handily and even a pure beta fund like Vanguard's Total World is nice to bring up in threads like this. :mrgreen: "

Also, don't forget that QSPIX is getting you both sides of the factor premiums. Long and short. Long only would cost less. QSPIX is still pricey no matter how you cut it but it is "giving" you more. I don't think Market Neutral is a factor play but I may be mistaken in that regard.
Last edited by matjen on Sun Jun 07, 2015 7:26 am, edited 2 times in total.
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Re: QSPIX - thoughts on interesting fund

Post by DaufuskieNate » Sun Jun 07, 2015 7:11 am

Anyone who wants to go beyond the marketing literature and learn more about the theoretical underpinnings of this fund should read Antti Ilmanen's book Expected Returns.

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Re: QSPIX - thoughts on interesting fund

Post by Call_Me_Op » Sun Jun 07, 2015 7:12 am

Unfortunately, this fund did not exist in 2008 - so we can't see how it stands-up to extreme market stress. By the way, Fidelity's website indicates an expense ratio of 2.61% for the fund.
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Re: QSPIX - thoughts on interesting fund

Post by matjen » Sun Jun 07, 2015 7:23 am

Call_Me_Op wrote:Unfortunately, this fund did not exist in 2008 - so we can't see how it stands-up to extreme market stress. By the way, Fidelity's website indicates an expense ratio of 2.61% for the fund.


ER is 1.5%. Fees have been waived and are staying that way.

Market really has been pretty stable since I have owned QSPIX. There was a rough patch in Sept. 14 and I wrote this regarding its performance for Sept and one day of Oct.:

matjen wrote:So September was a rough month for most asset classes. Thought I would take a quick look and see how QSPIX did. I personally sold some bond funds and REITs to move a bit into this fund. With the enormous caveat that this is only one month I still wanted to take a look. My eyeball tells me that it certainly isn't as smooth a ride as total bond but isn't as volatile as total US market. It did turn a profit in a difficult month though.

Image


We also have the backtested results for 2008 which are, of course, backtested...cough. ;-)

http://www.forbes.com/sites/phildemuth/ ... -israel/2/

Q for Ronen Israel: How would a style premia type of strategy have performed in 2008?

Israel: Based on our research, a broadly diversified, market-neutral style premia strategy would have been down about 5% in 2008. Yet, the strategy would have likely been close to flat in the months of September through December of that year, when markets really sold off, further emphasizing its market neutrality and diversification benefits to a traditional equity portfolio. This market neutrality is further evident when you look at longer term correlations of a broadly diversified, market-neutral style premia strategy to traditional markets. For example, the estimated correlation between such a style premia strategy and the MSCI World Index is 0.01 over the period 1990 through September 2013.

Note that every crisis is different. During the steep equity market sell off from March of 2000 through September 2002, when the equity market was down around 60%, according to our research a broadly diversified, market-neutral style premia strategy would have been up decently, providing diversification to a traditional equity portfolio. Market-neutrality does not mean you make money in every crisis – the word is “neutral” not “short”! But it does mean, unlike most traditional investments, you should excel in some of these periods, and have no tendency to get really killed in them in general. Our tests really bear this out.
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Re: QSPIX - thoughts on interesting fund

Post by packer16 » Sun Jun 07, 2015 7:47 am

You bring up an interesting point, that is where would you put QSPIX in terms of asset baskets. If you look at the chart also you will see QSPIX is more volatile than Vanguard Market Neutral. Given its strategy of making factor bets versus being market neutral like Vanguard Market Neutral, I would put it in the equity category and I can find numerous stock index funds that will beat QSPIX hands down. It is trailing VFINX by a significant margin. IMO I like to take my risk where I think I will get the highest return. QSPIX IMO is taking equity level risk (they claim less but I am skeptical of this - in the 2008 crash Vanguard Market Neutral declined by 8% then 11% in 2009 - a total of about 20% in total) and giving AQR 150bp of the return out of the gate. I would be interested in this fund if I had a chance to buy at less than 50bp.

BTW you are actually paying 2.61% a portion of which the fund is paying the dividends to short sellers. This a result of short selling but a cost none the less.

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Re: QSPIX - thoughts on interesting fund

Post by longinvest » Sun Jun 07, 2015 7:51 am

Somehow, I'm really having a difficut time to see how QSPIX fits into our philosophy:

1 Develop a workable plan
2 Invest early and often
3 Never bear too much or too little risk
4 Diversify
5 Never try to time the market
6 Use index funds when possible
7 Keep costs low
8 Minimize taxes
9 Invest with simplicity
10 Stay the course


Of course, our philosophy is so boring* that we need to spend our time discussing active strategies to keep this forum alive. That must be it!

But, as a result, this forum ends up being noise that most of us should probably be tuning out... :annoyed

* Actually, it's not really boring in video format.
Last edited by longinvest on Sun Jun 07, 2015 12:22 pm, edited 1 time in total.
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Re: QSPIX - thoughts on interesting fund

Post by DaufuskieNate » Sun Jun 07, 2015 8:27 am

longinvest wrote:Somehow, I'm really having a difficut time to see how QSPIX fits into our philosophy:

Of course, our philosophy is so boring* that we need to spend our time discussing active strategies to keep this forum alive. That must be it!

But, as a result, this forum ends up being noise that most of us should probably be tuning out... :annoyed

* Actually, it's not really boring in video format.


This line of thought raises what I consider to be a really interesting question. Mr. Bogle himself pushed beyond the conventional wisdom of his day and developed what you are referring to as our philosophy. So now for the interesting question:

Is it our philosophy to adhere slavishly to the precepts of Mr. Bogle or to follow his lead and continually challenge conventional wisdom in the unending search for new knowledge?

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Re: QSPIX - thoughts on interesting fund

Post by midareff » Sun Jun 07, 2015 8:36 am

nedsaid wrote:
nisiprius wrote:Wow, AQR seems to be the hot new trend. It used to be DFA, DFA, DFA... now all I hear about is AQR, AQR, AQR... I have the feeling that something happened and I didn't get the memo...


I think it hit the spam filter. ;o)



From inception on 10/30/2013 (per M*) $10K became $11,431.57 vs. that same $10K becoming $12,213.89 if it was the S&P500. I don't want the memo.

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Re: QSPIX - thoughts on interesting fund

Post by Maynard F. Speer » Sun Jun 07, 2015 9:48 am

packer16 wrote:I believe and have seen active management work better than the market but am very skeptical of this "alternative" fund. In the past active managers have outperformed by being contrarian and correct, primarily in stock selection. This is simple and how the market works. When managers have been constrained by diversification, funds flows and higher fees they have struggled to outperform the indicies. What I find interesting is that some folks that would dismiss stock selection out of hand would buy this fund with higher fees. They are both doing the same thing, makes bets on being different that the market in hopes of doing better.


This is where I think you're conceptualising alternative investments in the wrong context ..

- Alternative investments aren't replacements for equities .. Equity-like investments are meant to drive growth in a portfolio - diversifiers are there primarily to reduce risk .. "The only free lunch in investing" .. We don't criticise bonds for not beating private equity - they serve *different* purposes

- Passive funds are every bit as active as any others .. They're just the collect active - securities are being priced by every fund and DIY investor collectively

- The arguments against active management are an issue of fund fees fractionally impacting compounded returns over years and decades, and managers being able to sustain a long-term edge over the average (after fees)

- But as studies show, poor portfolio diversification, and fearful investor behaviour, still tends to cost people a lot more .. Arnott suggested asset allocation actually accounts for over 100% of returns (when you factor negative returns from behaviour)

- What an alternative like this strives to do is use many different strategies at once to produce a positive return that's decoupled from broad market indicies .. The measure here isn't beating the equities market, because that would involve taking on equity-like risk .. This is about targeting a positive return whilst targeting bond or cash-like risk

- Studies have shown hedge-fund-like alternatives, such as this, improve almost any portfolio's risk adjusted returns (the optimum allocation usually being 20%) .. And if we entered a 25-year bear market, like Japan's, these should be just as able to produce a positive return .. Incidentally, same studies also show you almost can't diversify this kind of investment enough - holding 8-10 such funds is around optimal (and reduces the scope for human error)

People criticised Yale's 25% allocation to this kind of strategy, but from 2000 to the bottom of the market in 2008, alternatives were the only parts of the portfolio making positive returns .. Equities had returned -3%, and these were up in the 8s and 9s

I can't vouch for this particular fund, but I know of many like it
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Re: QSPIX - thoughts on interesting fund

Post by Robert T » Sun Jun 07, 2015 10:09 am

.
Few thoughts:

1. “Over the long-haul what matters is factor exposure and expense”. IMO this provides the framework for analysis and for (evidence-based) screening of potential investment options.

2. AQR does not provide public access to the simulated historical returns for the AQR style premia series (to me, this counts against them), so we don’t know the factor exposure of the historical series (as indicative of long-term characteristics).

3. What they do provide is aggregate performance data showing value added when the AQR series is added to a stock:bond market portfolio. From Exhibit 6 in the linked paper: Understanding Style Premia

Annual return (%)/SD/Sharpe
6.7/9.5/0.34 = 60% MSCI World Index:40% BG Agg. Hedged Index
8.8/7.3/0.73 = 42% MSCI World Index:28% BG Agg. Hedged Index:30% AQR Style Equity

4. The AQR series is one way to get factor exposure, but there are other long-only options. The key questions are does the AQR series provide: (i) unique ‘factor exposure’ to an overall portfolio relative to long only options?; or (ii) does it provide similar portfolio factor exposure at lower cost? The key is to view it in a portfolio context against other ways of getting similar factor exposure.

5. In comparison with other forms of factor exposure, compared to a portfolio with similar equity exposure, I find little ‘unique factor exposure’ value added – for example.

Annual return (%)/SD/Sharpe
8.8/7.3/0.73 = 42% MSCI World Index:28% BG Agg. Hedged Index:30% AQR Style Equity
9.3/7.3/0.83 = 40% Global Value and Small Cap tilt (with 0.2/0.4 small:value load):60% 5 yr T-notes

And the expense ratio of the portfolio with 30% AQR style equity would have a higher expense ratio of over 0.5% compared to about 0.35% for the long-only portfolio (and lower tax efficiency). You could probably use the above result to infer the indicative factor exposure of the AQR style series.

6. Obviously the results would vary dependent on a portfolios stock:bond target, but we can't compare as we don’t have the data.

7. IMO, the main case for adding AQR style equity is – for example if you only have market options in particular accounts (e.g. 401ks) but are targeting a particular size and value tilt. The AQR style premia fund may be an efficient way to achieve your targets as it provides exposure to ‘non-market’ factors with little or no exposure to the market factor.

Time will tell as we have more information on performance. If AQR make the historical series available we will have more evidence to make decisions, but in the absence of that, we make decisions on current available evidence (as in the linked paper).

Obviously no guarantees.

Robert
.

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Re: QSPIX - thoughts on interesting fund

Post by stlutz » Sun Jun 07, 2015 10:17 am

If I buy a Treasury bond or a CD, I can necessarily expect to produce a positive return for me. I will get interest every year and then get my principal back at maturity. Stocks also necessarily produce positive returns--companies sell things a profit and distribute those profits to shareholders.

With this fund, the return I can necessarily expect is zero. Actually it would be fairly significantly negative once the ER and costs of leverage/shorting are included. Thus the possible benefit to me comes from two possible sources:

a) the power of negative correlation will be so huge that it will overwhelm the negative returns generated by the fund. This could happen, but things definitely have to play out pretty much entirely "correctly" in order for it to work out. I don't think correlations are that predictable.

b) The style premia are pretty much guaranteed to persist. I know some here think so; I don't.

Costs are guaranteed; correlations and factor returns are not. That is why focusing on the former is so important.

AQR is definitely meeting a customer desire--to have passive-sounding active-management strategies. I don't think that customer desire is a good one, however.

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Re: QSPIX - thoughts on interesting fund

Post by Ketawa » Sun Jun 07, 2015 10:24 am

QSPIX is 10% of my portfolio. There is a lot of talk about AQR on the forum because retail investors can access their funds through Fidelity and TD Ameritrade.

It's almost useless to compare returns of this fund against equities or fixed income in isolation, so I don't even bother. It doesn't even have exposure to equities or fixed income. Of course the fund hasn't been around for long, but the results have been encouraging so far.

Since 2014:

Code: Select all

                           CAGR    Sharpe Ratio
60% VT/40% BND              6.0%       1.08
50% VT/40% BND/10% QSPIX    6.0%       1.32


QSPIX has had zero correlation with fixed income and negative correlation with equities, all while having positive returns.

Monthly Correlations

Code: Select all

Ticker       VT     BND   QSPIX
VT            -    -0.32   -0.14
BND        -0.32      -    -0.01
QSPIX      -0.14   -0.01      -

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Re: QSPIX - thoughts on interesting fund

Post by Maynard F. Speer » Sun Jun 07, 2015 11:05 am

stlutz wrote:If I buy a Treasury bond or a CD, I can necessarily expect to produce a positive return for me. I will get interest every year and then get my principal back at maturity. Stocks also necessarily produce positive returns--companies sell things a profit and distribute those profits to shareholders.


But they can both go long stretches without producing positive real returns ..

I believe there have been four periods of over 10 years since 1900 in which stocks have struggled to produce a positive real return (and much longer in global markets), while I believe bonds managed a 40-year and a 20-year stretch of negative real returns in the 20th century

Investing in indices, you're at the mercy of market direction .. Companies can keep distributing profits to shareholders, but if the global economy falters, you're still paying someone else to spend your money
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Re: QSPIX - thoughts on interesting fund

Post by lack_ey » Sun Jun 07, 2015 11:59 am

packer16 wrote:I believe and have seen active management work better than the market but am very skeptical of this "alternative" fund. In the past active managers have outperformed by being contrarian and correct, primarily in stock selection. This is simple and how the market works. When managers have been constrained by diversification, funds flows and higher fees they have struggled to outperform the indicies. What I find interesting is that some folks that would dismiss stock selection out of hand would buy this fund with higher fees. They are both doing the same thing, makes bets on being different that the market in hopes of doing better. I just think that stock selection is an easier process to understand because you are dealing with fundamental factor that can be measured (value) which can be compared to a price versus this alternative fund which I think is based upon future correlations and returns which in my book are unknowable and how do you know when to buy/sell factors (?). IMO the more complex the fund gets in terms of factor bets the worse it gets in terms of unknowables. At least with stock selection, if you find an undervalued security you can be pretty much be assured that within 3 to 5 years the value be realized and you have a benchmark to measure the value.

If somebody is running long-only stock picking, you can access that source of return with an index fund. You're paying for the hope that manager discretion (fundamental, algorithmic, gut calls, whatever) provides alpha over the fees paid.

You seem to misunderstand what the style premia fund is doing. For each of the four styles, it goes long on whatever is exposed to that factor and short whatever has negative exposure. It doesn't need to estimate correlations anywhere. For example, for value in equities it may look at price relative to book value and other such metrics. Go long something with high value by the definition chosen and go short something with low value. The exact security selection and trading process for managing buys and sells is of course algorithmic and part of the secret sauce. Here people are flying blind and assuming that they know what they're doing with respect to execution and not getting killed by transaction costs.

packer16 wrote:I also thought one the advantages of factors was there lower cost implementation versus active strategies. With this fund this concept is turned on it head. If you had this alternative a reasonable fee (around 50bp) then it may be worth it to see if the creators may have found some kind of special sauce. I think Vanguard has a fund like this that focuses on factors in hedged or risk neutral way (like valuation, momentum and quality) with modest fees (0.25%), Vanguard Market Neutral. I am surprised that other have not looked at this and compared it to QSPIX. Some have said that QSPIX provides exposure to other risk factors (like currency and shorting) but is it worth the incremental 125bp? (BTW you can also get long exposure to the most persistent factors for dirt cheap prices at Vanguard also with Vanguard SCV).

Sure, a factor tilt with the same exposures as an actively managed fund can be gotten for cheaper than the active fund. You do not, for better or worse, find any active funds out there with exposures like this has.

Going by Vanguard's site, the market neutral fund has an ER of 1.64% as of 4/28/15 and old reports seem to indicate ERs 1.5% or so. Morningstar lists a lower figure but I doubt that's right. I don't know of any hedged fund that's much cheaper than 1%.

Currency and shorting are not risk factors, just part of the assets and tools for this fund and others. The exposure to carry (not in equities) and value/momentum/defensive in multiple asset classes other than equities at least offers something different and not really found elsewhere. Obviously that's to be expected—they want something relatively novel, whether it works or not, to convince people to fork over the management fees. And obviously they're going to have a slick-looking backtest. Who doesn't?

packer16 wrote:I also struggle to see how an individual or an institution can really use this. I agree with nisiprius give me risk at the lowest cost and let me figure out how to combine it to meet my needs. In most cases if others try to manage volatility for me it comes at a cost, here it is 150bp per yr. IMO the easiest way to do this is to hold a 3 to 5 year of expenses (longer if you are more risk averse) in something safe like ST bonds or CDs and the rest in some assets where you will get rewarded to take volatility like equities or real estate. This fund IMO is trying to finesse volatility at a steep price. If you like this type of fund Vanguard Market Neutral all the way.

Are you talking about this fund's volatility (which is managed) or that of an entire AA including something like this?


Maynard F. Speer wrote:- What an alternative like this strives to do is use many different strategies at once to produce a positive return that's decoupled from broad market indicies .. The measure here isn't beating the equities market, because that would involve taking on equity-like risk .. This is about targeting a positive return whilst targeting bond or cash-like risk

Just to be clear, the target of 10% volatility (think a 60/40 allocation), negative skew, and all the leverage and shorting inside and lack of guarantees puts this at solidly higher than bond or cash-like risk, unless maybe you mean long bonds.

Some would consider the risk here greater than for equities despite the likely lower volatility, which I think might be fair. Let's say equity risk and value/momentum/carry/defensive all produce lower returns in the future. Low-cost equity exposure would still earn you money. After fees and expenses, this might lose you money. There are a lot of ways for a complex strategy heavy in derivatives to blow up. A 23-year backtest and a year or two of operation showing smooth sailing is no guarantee disaster isn't looming in the horizon at some point. The strategy lost -15% in the backtest at one point, and in practice it might lose a bunch more.

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Re: QSPIX - thoughts on interesting fund

Post by Maynard F. Speer » Sun Jun 07, 2015 12:40 pm

lack_ey wrote:Just to be clear, the target of 10% volatility (think a 60/40 allocation), negative skew, and all the leverage and shorting inside and lack of guarantees puts this at solidly higher than bond or cash-like risk, unless maybe you mean long bonds.

Some would consider the risk here greater than for equities despite the likely lower volatility, which I think might be fair. Let's say equity risk and value/momentum/carry/defensive all produce lower returns in the future. Low-cost equity exposure would still earn you money. After fees and expenses, this might lose you money. There are a lot of ways for a complex strategy heavy in derivatives to blow up. A 23-year backtest and a year or two of operation showing smooth sailing is no guarantee disaster isn't looming in the horizon at some point. The strategy lost -15% in the backtest at one point, and in practice it might lose a bunch more.


Well I'd certainly agree a backtest wouldn't fit my criteria for investing ... (What I'd hope, with a company like AQR, is that they'd have researched the field and would be implementing the strategies as academically as possible)

Now on risk, the use of derivatives, relative value, leverage, tilts, etc. with these funds can make an individual strategy risky .. But that's why they diversify .. If you've got a dozen, two dozen, strategies - all uncorrelated, all risk offset against each other, stress-tested against worst-case scenarios (as these kind of funds should be doing) - the portfolio risk of an individual strategy failing becomes quite small .. And this is the "Free lunch" of diversification .. And suitably diversified, these funds tend to sit very high on efficient frontiers (whether they're targeting high or moderate returns)

So it gives you a different worst case scenario .. In equities, a worst case scenario is a global financial crisis taking stocks down 80-90% .. With hedge-like funds, the two worst cases are generally 1) fraud (a manager running off with all the money, or secretively exposing investors to very high risk strategies), and 2) mathematical anomalies .. There was an event in the 80s in which, through sheer statistical improbability, virtually every prediction you could have made about every market (from currency to futures to commodities) was wrong .. and that took a number of hedge funds down ... Of course they were often heavily leveraged, with different institutional regulations, targeting very high returns
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Re: QSPIX - thoughts on interesting fund

Post by packer16 » Sun Jun 07, 2015 12:51 pm

lack_ey wrote:
packer16 wrote:I believe and have seen active management work better than the market but am very skeptical of this "alternative" fund. In the past active managers have outperformed by being contrarian and correct, primarily in stock selection. This is simple and how the market works. When managers have been constrained by diversification, funds flows and higher fees they have struggled to outperform the indicies. What I find interesting is that some folks that would dismiss stock selection out of hand would buy this fund with higher fees. They are both doing the same thing, makes bets on being different that the market in hopes of doing better. I just think that stock selection is an easier process to understand because you are dealing with fundamental factor that can be measured (value) which can be compared to a price versus this alternative fund which I think is based upon future correlations and returns which in my book are unknowable and how do you know when to buy/sell factors (?). IMO the more complex the fund gets in terms of factor bets the worse it gets in terms of unknowables. At least with stock selection, if you find an undervalued security you can be pretty much be assured that within 3 to 5 years the value be realized and you have a benchmark to measure the value.

If somebody is running long-only stock picking, you can access that source of return with an index fund. You're paying for the hope that manager discretion (fundamental, algorithmic, gut calls, whatever) provides alpha over the fees paid.

You seem to misunderstand what the style premia fund is doing. For each of the four styles, it goes long on whatever is exposed to that factor and short whatever has negative exposure. It doesn't need to estimate correlations anywhere. For example, for value in equities it may look at price relative to book value and other such metrics. Go long something with high value by the definition chosen and go short something with low value. The exact security selection and trading process for managing buys and sells is of course algorithmic and part of the secret sauce. Here people are flying blind and assuming that they know what they're doing with respect to execution and not getting killed by transaction costs.

packer16 wrote:I also thought one the advantages of factors was there lower cost implementation versus active strategies. With this fund this concept is turned on it head. If you had this alternative a reasonable fee (around 50bp) then it may be worth it to see if the creators may have found some kind of special sauce. I think Vanguard has a fund like this that focuses on factors in hedged or risk neutral way (like valuation, momentum and quality) with modest fees (0.25%), Vanguard Market Neutral. I am surprised that other have not looked at this and compared it to QSPIX. Some have said that QSPIX provides exposure to other risk factors (like currency and shorting) but is it worth the incremental 125bp? (BTW you can also get long exposure to the most persistent factors for dirt cheap prices at Vanguard also with Vanguard SCV).

Sure, a factor tilt with the same exposures as an actively managed fund can be gotten for cheaper than the active fund. You do not, for better or worse, find any active funds out there with exposures like this has.

Going by Vanguard's site, the market neutral fund has an ER of 1.64% as of 4/28/15 and old reports seem to indicate ERs 1.5% or so. Morningstar lists a lower figure but I doubt that's right. I don't know of any hedged fund that's much cheaper than 1%.

Currency and shorting are not risk factors, just part of the assets and tools for this fund and others. The exposure to carry (not in equities) and value/momentum/defensive in multiple asset classes other than equities at least offers something different and not really found elsewhere. Obviously that's to be expected—they want something relatively novel, whether it works or not, to convince people to fork over the management fees. And obviously they're going to have a slick-looking backtest. Who doesn't?

packer16 wrote:I also struggle to see how an individual or an institution can really use this. I agree with nisiprius give me risk at the lowest cost and let me figure out how to combine it to meet my needs. In most cases if others try to manage volatility for me it comes at a cost, here it is 150bp per yr. IMO the easiest way to do this is to hold a 3 to 5 year of expenses (longer if you are more risk averse) in something safe like ST bonds or CDs and the rest in some assets where you will get rewarded to take volatility like equities or real estate. This fund IMO is trying to finesse volatility at a steep price. If you like this type of fund Vanguard Market Neutral all the way.

Are you talking about this fund's volatility (which is managed) or that of an entire AA including something like this?


Maynard F. Speer wrote:- What an alternative like this strives to do is use many different strategies at once to produce a positive return that's decoupled from broad market indicies .. The measure here isn't beating the equities market, because that would involve taking on equity-like risk .. This is about targeting a positive return whilst targeting bond or cash-like risk

Just to be clear, the target of 10% volatility (think a 60/40 allocation), negative skew, and all the leverage and shorting inside and lack of guarantees puts this at solidly higher than bond or cash-like risk, unless maybe you mean long bonds.

Some would consider the risk here greater than for equities despite the likely lower volatility, which I think might be fair. Let's say equity risk and value/momentum/carry/defensive all produce lower returns in the future. Low-cost equity exposure would still earn you money. After fees and expenses, this might lose you money. There are a lot of ways for a complex strategy heavy in derivatives to blow up. A 23-year backtest and a year or two of operation showing smooth sailing is no guarantee disaster isn't looming in the horizon at some point. The strategy lost -15% in the backtest at one point, and in practice it might lose a bunch more.


I do think I understand what they are doing and correlation is important. Going long one security with a factor and short another requires both to move as expected, presumably based upon past correlation, however, the future is different than the past I do not see how this works out well. Maybe this what caused the almost 20% decline in the Vanguard Market Neutral product. In any case, I would put the risk on par with equities.

You mention that stock pickers only have one source of return which is not true. I am a stock picker (appraiser) and I am able to get high exposure to value, size, quality and illiquidity factors in a much more focused manner than these "diversified" factor funds. For each factor, there is varying degrees of exposure in each stock examined and diversification by its very nature is diluting the effect of a given factor. This is part of the reason active funds cannot out perform indicies (i.e. they have to hold both there 100th and best idea in similar proportions). IMO these factors are just proxies to what drives stock prices (valuation).

As to fees, 1.6% for Vanguard Market Neutral includes dividends paid to longs to go short so that is comparable to 2.61% for this fund. The other more important point is that hedge funds don't make sense due in large part due to the fees so why does this fund?

I also think the argument of not looking at this in isolation is a red herring. For most of us, we want to grow our wealth to be utilized in the future for expenses. Thus the pot we use for expenses should be in something safe (definately not this fund) but most likely CDs or iBonds. The remaining funds IMO should be invested in things were we can get the highest return for the risk taken. When you start getting "helpers" providing you different levels of risk not found in direct exposure to asset classes (ie index funds), the fees start to add up and you are making a bet that there active management can overcome the fees. If this cannot be done with diversified stock selection why do we think it can be done diversified factor selection.

In summary, I think these guys have developed some pretty interesting abstractions and historical simulations to convince people that paying 1.5% (2.6% if you include the cost to short) is worth the price of admission. I am from Missouri on this one.

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Re: QSPIX - thoughts on interesting fund

Post by matjen » Sun Jun 07, 2015 1:08 pm

packer16 wrote:The other more important point is that hedge funds don't make sense due in large part due to the fees so why does this fund?
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Simple answer. A Hedge Fund running this type of strategy a few years ago would likely cost 2 and 20. So 200 basis points in management fees and 2000 basis points on any performance. QSPIX is 150 basis points.
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Re: QSPIX - thoughts on interesting fund

Post by lack_ey » Sun Jun 07, 2015 1:40 pm

Maynard F. Speer wrote:Well I'd certainly agree a backtest wouldn't fit my criteria for investing ... (What I'd hope, with a company like AQR, is that they'd have researched the field and would be implementing the strategies as academically as possible)

Now on risk, the use of derivatives, relative value, leverage, tilts, etc. with these funds can make an individual strategy risky .. But that's why they diversify .. If you've got a dozen, two dozen, strategies - all uncorrelated, all risk offset against each other, stress-tested against worst-case scenarios (as these kind of funds should be doing) - the portfolio risk of an individual strategy failing becomes quite small .. And this is the "Free lunch" of diversification .. And suitably diversified, these funds tend to sit very high on efficient frontiers (whether they're targeting high or moderate returns)

So it gives you a different worst case scenario .. In equities, a worst case scenario is a global financial crisis taking stocks down 80-90% .. With hedge-like funds, the two worst cases are generally 1) fraud (a manager running off with all the money, or secretively exposing investors to very high risk strategies), and 2) mathematical anomalies .. There was an event in the 80s in which, through sheer statistical improbability, virtually every prediction you could have made about every market (from currency to futures to commodities) was wrong .. and that took a number of hedge funds down ... Of course they were often heavily leveraged, with different institutional regulations, targeting very high returns

Well, here they only have four strategies. That's probably safer than only having one or two. Their data and research and that in the literature at large on value and momentum go for many many more decades, which is no guarantee of anything but certainly better than two-and-a-half decades. There's less data for which to look at some of the others and across non-equity asset classes.

Like I said earlier, if everything goes roughly as they expect, this is a very good investment despite the high fees. But I would characterize "mathematical anomalies" as more of "managers don't know as much as they hope they know about the world because best models necessarily based on past history are often way wrong at times." The expectation should be more that these things should happen rather than that they won't.


packer16 wrote:I do think I understand what they are doing and correlation is important. Going long one security with a factor and short another requires both to move as expected, presumably based upon past correlation, however, the future is different than the past I do not see how this works out well. Maybe this what caused the almost 20% decline in the Vanguard Market Neutral product. In any case, I would put the risk on par with equities.

I don't see why long-short is necessarily based on correlation other than assuming it is not 1. If the correlation is 1 then you're just canceling out your bets by going long one and short the other. There is not really any particular expectation of movement other than each style working more than half the time or so.

packer16 wrote:You mention that stock pickers only have one source of return which is not true. I am a stock picker (appraiser) and I am able to get high exposure to value, size, quality and illiquidity factors in a much more focused manner than these "diversified" factor funds. For each factor, there is varying degrees of exposure in each stock examined and diversification by its very nature is diluting the effect of a given factor. This is part of the reason active funds cannot out perform indicies (i.e. they have to hold both there 100th and best idea in similar proportions). IMO these factors are just proxies to what drives stock prices (valuation).

I said that you can access "that source of return" i.e. that of the market (from long-only stock picking) via an index fund. If you're intentionally searching for other factors/attributes and consider the process not to generate alpha but count them as other exposures, and there is not yet an index for what you're doing then I will concede your point.

From a fee perspective, if you pay a manager to do this, then from the perspective of the total portfolio and AA I think it's fair to conceptualize this as paying for market beta plus alpha. You want the differences from the benchmark to be positive, but a lot of the returns are still tied to the market exposure. There will be a fairly high correlation to stocks as a whole.

Higher fees are relatively more justified if the fund provides sources of return more different from other assets you can access for cheap.

packer16 wrote:As to fees, 1.6% for Vanguard Market Neutral includes dividends paid to longs to go short so that is comparable to 2.61% for this fund. The other more important point is that hedge funds don't make sense due in large part due to the fees so why does this fund?

I think many of those who own this fund or similar ones may consider hedge funds and other alternatives too.

But most hedge funds are on a whole different level with respect to potential problems.
1. Usually higher fees — 2&20 and similar arrangements cost a lot more than this does
2. Poor incentives — 2&20 incentivizes risk taking
3. Lack of transparency and protections based on the legal structure
4. Poor liquidity — something of an issue if you want to rebalance, for example
5. Not actually being hedged — on average they have around 0.4 market beta

Not all of these are problems with every hedge fund, but I don't think it's fair to lump in alternatives mutual funds with hedge funds based on just a fees-are-high screen for both.

packer16 wrote:In summary, I think these guys have developed some pretty interesting abstractions and historical simulations to convince people that paying 1.5% (2.6% if you include the cost to short) is worth the price of admission. I am from Missouri on this one.

Don't forget the high transaction costs from all the trading and style chasing.

Basically, the barrier to overcome for profitability is very large and a fee of 1.5% is just a part of it. It certainly seems like it can happen, even in the real world, though.


For what it's worth, they have a low volatility version (QSLIX) targeting half the volatility by just using less leverage. It has an ER of 0.85%.

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Re: QSPIX - thoughts on interesting fund

Post by backpacker » Sun Jun 07, 2015 1:53 pm

packer16 wrote:IMO the more complex the fund gets in terms of factor bets the worse it gets in terms of unknowables.


I agree. I like my fundamentally weighted value funds because they are simple, mechanical, and completely transparent. I know exactly how my funds work. If I had a large enough portfolio, I could easily clone the strategy on my own with individual stocks.

The AQR style fund is absurdly complex. QSPIX targets six asset classes using four different long-short strategies and leverage. It's a black box. No one here could recreate the fund using publicly available information. Without being able to build the fund from scratch, we have no way of even guessing at what could go wrong.

I've spent a few years reading about value strategies. I'm no expert, not even close. But I more or less understand the single long-only bet on value that my portfolio is making. With six asset classes and four strategies, the AQR fund is making somewhere between 12 and 24 factor bets. How could any investor, short of doing a Ph.D in finance and working for AQR, understand all 12-24 factor bets and the details of how those factor bets are being implemented? Without understanding those bets, what reason could there be for thinking that AQR's strategy is sensible and worth 1.5% a year in fees? A vague feeling that this fund is "sophisticated" and "academic" and "invested in a bunch of things"?
Last edited by backpacker on Sun Jun 07, 2015 2:48 pm, edited 1 time in total.

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Re: QSPIX - thoughts on interesting fund

Post by garlandwhizzer » Sun Jun 07, 2015 2:16 pm

I think the point needs to be made that putting you money under the mattress or burying it in the back yard also is certain to be a strategy which dramatically diversifies returns relative to being long on equities, long on bonds or any other asset class, short on equities, short on bonds or any other asset class. This strategy costs nothing but inflation. Whether QSPIX will effectively produce overall portfolio benefit (diversification/return) in the long run is not clear to me at least. Its long/short strategy seems to me complex and expensive to employ, requiring great skill to be effective, and competitive in light of the fact that similar strategies are often used by hedge funds to some extent. That, I believe, is how the term hedge fund originated. Like QSPIX hedge funds are expensive, even more so.

I am at heart an old fashioned simple guy and I'll stick with being long only stocks, bonds, and cash. I believe that in the long term in spite of significant volatility along the way, my portfolio will produce substantial positive returns. I have confidence, having been through 2 severe bear markets without panic selling, that I can stay on plan during the inevitable downturns and that ultimately I'll be rewarded for tolerating that volatility. Volatility can even work in the favor of a few rare investors like Warren Buffett who uses cash--the equivalent of money under the mattress--to load up on equities when they're selling at fire sale prices.

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Re: QSPIX - thoughts on interesting fund

Post by pkcrafter » Sun Jun 07, 2015 2:24 pm

Vote - Does AQR style investing, considering cost, qualify as a Boglehead strategy?

If it actually does produce higher risk-adjusted returns other managers will use it. It will become popular and then the norm. From there the market will incorporate it and Vanguard will provide a low cost index fund. I'll wait. :D

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Re: QSPIX - thoughts on interesting fund

Post by Ketawa » Sun Jun 07, 2015 2:39 pm

There are already some index funds using strategies similar to AQR's. MSCI has some multi factor indexes and I believe there are some iShares ETFs already following them. I have stuck with AQR's funds. I hold the domestic small cap, international developed, and emerging markets multi-style funds.

I doubt you could replicate QSPIX's strategy using an index fund.

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