QSPIX - thoughts on interesting fund

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DaufuskieNate
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Re: QSPIX - thoughts on interesting fund

Postby DaufuskieNate » Mon Jun 08, 2015 1:22 pm

Taylor -

Yes, and I agree that it is very helpful to have short summaries that people can actually digest. I was referring to the much longer version in the Statutory Prospectus for TSM. My point is that many good funds have long risk sections. Doesn't make them bad funds. It's simply the evolution of a sometimes absurd legal environment.

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Taylor Larimore
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Re: QSPIX - thoughts on interesting fund

Postby Taylor Larimore » Mon Jun 08, 2015 1:42 pm

DaufuskieNate wrote:Taylor -

Yes, and I agree that it is very helpful to have short summaries that people can actually digest. I was referring to the much longer version in the Statutory Prospectus for TSM. My point is that many good funds have long risk sections. Doesn't make them bad funds. It's simply the evolution of a sometimes absurd legal environment.

DaufuskieNate:

The risks I listed came from the "Statutory Prospectus for TSM."

Best wishes.
Taylor
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backpacker
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Re: QSPIX - thoughts on interesting fund

Postby backpacker » Mon Jun 08, 2015 1:54 pm

countmein wrote:Backpacker-- it's funny, the concerns you have about QSPIX remind me of the ones I have about VTSAX. Ever take a look at some of the companies your fund is invested in? Know who the CEOs are? Whose brother-in-law they had to be to get the job? Know whether they're cooking the books? Or just plain throwing your money into the wind? Statistical investing of all stripes requires a leap of faith. You never really know what you own.


I get that feeling too sometimes. :happy

Investing is VTSAX is buying a piece of the economy. But how could anyone possibly know whether what the economy is doing makes any sense? We know that it sometimes makes stupid mistakes (e.g. pouring huge amounts of money into stocks just because they had something to do with that "internet" thing). Or take the 80-91 market in Japan, which behaved more or less like a four-year-old at an all-you-can-eat candy buffet.

One of the reasons that I don't worry too much about the management of the individual companies in my fund is I know that other investors, who know more than I do, are monitoring those companies and their businesses. If management starts doing stupid things, those investors will sell the company, short the company, and generally decrease its price (thus decreasing its allocation in my portfolio).

When it comes to mutual funds, there's no similar mechanism in place. There's no mechanism that would automatically decrease my allocation to QSPIX if AQR started tweaking their formulas in a way that made no sense. Other outside invests don't have more access to what the fund is doing than I do.

There's also the issue of costs. If QSPIX and VTSAX were the same cost, I would be much happier owning a bit of QSPIX. But since the on is 1.4% more expensive than the other, I need to understand its advantages clearly enough to make my own estimate of what the extra factor exposure is worth. I know how to do that (more or less) with simple long-only value funds. I come up with my own estimates of loadings and my own discounted estimate of future factor returns. I don't know how to do that with so many moving pieces and so little data from AQR, so have no way to know what their 1.4% in added fees would buy me.

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Re: QSPIX - thoughts on interesting fund

Postby lack_ey » Mon Jun 08, 2015 2:06 pm

Like I said before, the management fees are not even that high compared to the costs of all the leverage, shorting, and transactions. There is a huge hurdle to overcome to make money here, largely doing things that "shouldn't" work if many views of market pricings are correct. (and yet so far in a very brief year and a half, returns have been 8.5% annualized with practically zero correlation to stocks and bonds, supposedly no net exposure to asset classes)

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Re: QSPIX - thoughts on interesting fund

Postby matjen » Mon Jun 08, 2015 2:11 pm

lack_ey wrote:Like I said before, the management fees are not even that high compared to the costs of all the leverage, shorting, and transactions. There is a huge hurdle to overcome to make money here, largely doing things that "shouldn't" work if many views of market pricings are correct. (and yet so far in a very brief year and a half, returns have been 8.5% annualized with practically zero correlation to stocks and bonds, supposedly no net exposure to asset classes)


The hell you say...who would care about that? ;-)

More importantly, how long has it been since Cliff Asness stopped beating his wife? (j/k)

P.S. sorry for the false attribution earlier lack_ey.
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backpacker
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Re: QSPIX - thoughts on interesting fund

Postby backpacker » Mon Jun 08, 2015 2:14 pm

lack_ey wrote:Like I said before, the management fees are not even that high compared to the costs of all the leverage, shorting, and transactions.


What do you mean? The management fees are 1.35%. Those fees (as I understand them) don't have anything to do with the cost of levering, shorting, etc. They're fees that AQR wants us to pay them for being smart.

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Re: QSPIX - thoughts on interesting fund

Postby lack_ey » Mon Jun 08, 2015 2:39 pm

backpacker wrote:
lack_ey wrote:Like I said before, the management fees are not even that high compared to the costs of all the leverage, shorting, and transactions.


What do you mean? The management fees are 1.35%. Those fees (as I understand them) don't have anything to do with the cost of levering, shorting, etc. They're fees that AQR wants us to pay them for being smart.

The context was comparing the expense ratio to that of a broad stock market index fund. However, the expense ratio is only a part of the total costs to run a certain strategy, as assets must be traded and so on and so forth.

The total costs (everything, including the parts that do not show up in the expense ratio) for running a stock index fund are very low. To earn money, the underlying holdings have to generate a positive return that overcomes these costs, which are in the single digits basis points.

For the style premia fund, total costs of the fund are a few/several hundred basis points. Of that, 135 bp is the fee to the manager. That's the hurdle that all the long-short exposure needs to be overcome to earn money. And it has to do that without even being net long in anything that's "supposed" to earn money.

Basically, one is betting on these style exposures, which are managed to keep total expected volatility in the 10% range, to generate huge returns to overcome those costs. The crazy part is that so far, so good.

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Re: QSPIX - thoughts on interesting fund -- RISKS & TAXES

Postby nisiprius » Mon Jun 08, 2015 2:48 pm

DaufuskieNate wrote:
Taylor Larimore wrote:While reading the Prospectus, I noted that nearly half its return (which was less than the Total Stock Market) was lost to taxes.

This fund is not for me.

Best wishes.
Taylor
Lawyers and the SEC love long risk sections.
When people say "just a formality, some legal fine print the lawyers say we have to make you sign..." that is just when I say "OK, just give me a few minutes to read it through" and I read it through. My belief is that those lawyers know exactly what they're doing. And that in a risks section it is appropriate to consider each risk one by one and stop long enough to say "do I know what this risk is, and am I willing to take it?" The answer could certainly be yes, but you can't substitute some columnist' s judgement that overall it's a cool fund for your own. I think everybody should read the prospectus. I have to sign something that says I did and I won't sign a little white lie.
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Yesterdaysnews
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Re: QSPIX - thoughts on interesting fund

Postby Yesterdaysnews » Mon Jun 08, 2015 3:14 pm

I am combining this fund in my IRA with Vanguard Total World Stock in taxable - fantastic the way these two products work together. Super cheap vanguard ETF (VT) complimented by this fund in tax advantaged account. Average costs reduced significantly for low correlated assets.

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Re: QSPIX - thoughts on interesting fund

Postby longinvest » Mon Jun 08, 2015 3:33 pm

Thanks, Taylor, for the Principal Risks of Investing in the Fund extracted from the Prospectus for the Style Premia Alternative Fund (QSPIX) :

Forward and Futures Contract Risk: The successful use of forward and futures contracts draws upon the Adviser’s skill and experience with respect to such instruments and are subject to special risk considerations. The primary risks associated with the use of forward and futures contracts, which may adversely affect the Fund’s NAV and total return, are (a) the imperfect correlation between the change in market value of the instruments held by the Fund and the price of the forward or futures contract; (b) possible lack of a liquid secondary market for a forward or futures contract and the resulting inability to close a forward or futures contract when desired; (c) losses caused by unanticipated market movements, which are potentially unlimited; (d) the Adviser’s inability to predict correctly the direction of securities prices, interest rates, currency exchange rates and other economic factors; (e) the possibility that the counterparty will default in the performance of its obligations; and (f) if the Fund has insufficient cash, it may have to sell securities from its portfolio to meet daily variation margin requirements, and the Fund may have to sell securities at a time when it may be disadvantageous to do so.
...
Short Sale Risk: The Fund enters into a short sale by selling a security it has borrowed (typically from a broker or other
institution). If the market price of a security increases after the Fund borrows the security, the Fund will suffer a (potentially unlimited) loss when it replaces the borrowed security at the higher price. In certain cases, purchasing a security to cover a AQR Funds short position can itself cause the price of the security to rise further, thereby exacerbating the loss. In addition, the Fund may not always be able to borrow the security at a particular time or at an acceptable price. The Fund may also take a short position in a derivative instrument, such as a future, forward or swap. A short position on a derivative instrument involves the risk of a theoretically unlimited increase in the value of the underlying instrument which could cause the Fund to suffer a (potentially unlimited) loss. Short sales also involve transaction and financing costs that will reduce potential Fund gains and increase potential Fund losses.


I wouldn't touch this fund with a ten-foot pole!
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Yesterdaysnews
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Re: QSPIX - thoughts on interesting fund

Postby Yesterdaysnews » Mon Jun 08, 2015 5:02 pm

I'm not sure I totally get the fear. Just a way to hold uncorrelated assets in your portfolio at an albeit expensive price.

If one is a believer in MPT this is a desirable product.

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Re: QSPIX - thoughts on interesting fund

Postby Ketawa » Mon Jun 08, 2015 5:04 pm

longinvest wrote:Thanks, Taylor, for the Principal Risks of Investing in the Fund extracted from the Prospectus for the Style Premia Alternative Fund (QSPIX) :

I wouldn't touch this fund with a ten-foot pole!


Yes, that is how shorts work. I didn't need to read the prospectus to know that.

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Re: QSPIX - thoughts on interesting fund

Postby rrppve » Mon Jun 08, 2015 9:34 pm

Ketawa wrote:
longinvest wrote:Thanks, Taylor, for the Principal Risks of Investing in the Fund extracted from the Prospectus for the Style Premia Alternative Fund (QSPIX) :

I wouldn't touch this fund with a ten-foot pole!


Yes, that is how shorts work. I didn't need to read the prospectus to know that.

And a long only stock portfolio means you risk the total loss of all of your investment with the same legalese.
Seems the same to me once inside of a mutual fund wrapper, which also caps the unlimited loss on a short investment to the actual amount invested.

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Re: QSPIX - thoughts on interesting fund

Postby Maynard F. Speer » Mon Jun 08, 2015 10:07 pm

longinvest wrote:Thanks, Taylor, for the Principal Risks of Investing in the Fund extracted from the Prospectus for the Style Premia Alternative Fund (QSPIX) :

Forward and Futures Contract Risk: The successful use of forward and futures contracts draws upon the Adviser’s skill and experience with respect to such instruments and are subject to special risk considerations. The primary risks associated with the use of forward and futures contracts, which may adversely affect the Fund’s NAV and total return, are (a) the imperfect correlation between the change in market value of the instruments held by the Fund and the price of the forward or futures contract; (b) possible lack of a liquid secondary market for a forward or futures contract and the resulting inability to close a forward or futures contract when desired; (c) losses caused by unanticipated market movements, which are potentially unlimited; (d) the Adviser’s inability to predict correctly the direction of securities prices, interest rates, currency exchange rates and other economic factors; (e) the possibility that the counterparty will default in the performance of its obligations; and (f) if the Fund has insufficient cash, it may have to sell securities from its portfolio to meet daily variation margin requirements, and the Fund may have to sell securities at a time when it may be disadvantageous to do so.
...
Short Sale Risk: The Fund enters into a short sale by selling a security it has borrowed (typically from a broker or other
institution). If the market price of a security increases after the Fund borrows the security, the Fund will suffer a (potentially unlimited) loss when it replaces the borrowed security at the higher price. In certain cases, purchasing a security to cover a AQR Funds short position can itself cause the price of the security to rise further, thereby exacerbating the loss. In addition, the Fund may not always be able to borrow the security at a particular time or at an acceptable price. The Fund may also take a short position in a derivative instrument, such as a future, forward or swap. A short position on a derivative instrument involves the risk of a theoretically unlimited increase in the value of the underlying instrument which could cause the Fund to suffer a (potentially unlimited) loss. Short sales also involve transaction and financing costs that will reduce potential Fund gains and increase potential Fund losses.


I wouldn't touch this fund with a ten-foot pole!


As an investment class, futures are no riskier than any other asset class - such as equities .. They can all experience unlimited losses - which is why you diversify and risk-manage a portfolio

The use of leverage can make losses greater, but again it's no different from leveraging any other security - and any sensible manager will use stop-losses to limit damage ..

Here's the Barclays CTA index of managed futures - looking rather less risky than equities as a whole .. I certainly wouldn't expect any black holes to open up*

Image

(* actually I say that, but there might be a $700tn derivatives bubble out there at the moment, and if that bursts, I think it's safe to say futures funds would tank ... But then so would the stock market, bonds, presumably cash itself, and every person on the planet would be in debt to the tune of around $190,000)
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Re: QSPIX - thoughts on interesting fund

Postby grap0013 » Mon Jun 08, 2015 10:13 pm

Ketawa wrote: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      -


^ This post pretty much says it all. Now if it can deliver 4+ real returns I will be very pleased. For those of you who don't think this fund is a good diversifier then you clearly do not watch how it plays with other assets and I say to you, "you know nothing Jon Snow".

I will also add that Larry Swedroe attends a quarterly meeting where the AQR folks demonstrate where this fund's returns come from. They use a formulaic strategy. My gut says Larry is telling the truth.

Finally, the argument that you have to understand every nuance of this trading strategy is a little bit far reaching. Heck people put medicine into their own bodies and have no idea about how the medicine works and health is far more important than money.
There are no guarantees, only probabilities.

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Re: QSPIX - thoughts on interesting fund

Postby robert88 » Mon Jun 08, 2015 10:15 pm

Maynard F. Speer wrote:As an investment class, futures are no riskier than any other asset class - such as equities .. They can all experience unlimited losses - which is why you diversify and risk-manage a portfolio


I might be nit picking, but something like TSM can't actually go to zero or at least if it does and every publicly traded company of any size in the US goes bankrupt, I probably have much bigger worries than my portfolio.

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Unlimited losses ?

Postby Taylor Larimore » Mon Jun 08, 2015 10:30 pm

As an investment class, futures are no riskier than any other asset class - such as equities .. They can all experience unlimited losses -

This is incorrect. Investors in a stock mutual fund like Total Stock Market Index Fund will never experience "unlimited losses" unless every corporation in America ceased to exist--which will never happen.

Respected author and columnist, Jane Bryant Quinn, includes futures in her list of "Some Absolutely Awful Investments."

Best wishes.
Taylor
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Re: QSPIX - thoughts on interesting fund

Postby Yesterdaysnews » Mon Jun 08, 2015 10:36 pm

Perhaps I'm wrong, but I always assumed the "unlimited losses" is just how a short position works, cause theoretically the stock you have to buy back at some point could go up forever. There is no theoretic limit to how high it could go. Unlike a long position where the stock price can only go to zero. Thus a complete loss is possible but not "unlimited" losses.

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Re: QSPIX - thoughts on interesting fund

Postby lack_ey » Mon Jun 08, 2015 11:09 pm

Yesterdaysnews wrote:Perhaps I'm wrong, but I always assumed the "unlimited losses" is just how a short position works, cause theoretically the stock you have to buy back at some point could go up forever. There is no theoretic limit to how high it could go. Unlike a long position where the stock price can only go to zero. Thus a complete loss is possible but not "unlimited" losses.

Yes.

Taylor Larimore wrote:
As an investment class, futures are no riskier than any other asset class - such as equities .. They can all experience unlimited losses -

This is incorrect. Investors in a stock mutual fund like Total Stock Market Index Fund will never experience "unlimited losses" unless every corporation in America ceased to exist--which will never happen.

With enough economic and social upheaval and a fundamental switch from a market economy, it can happen without literally every company ceasing to exist. They just have to not exist in the way they do today. If a new government confiscates all the assets or ownership then that's that. Some country stock markets have effectively gone to zero, so there is precedence. Sure, this is a very remote possibility in modern-day America and probably future-day America, but it's not impossible.

Taylor Larimore wrote:Respected author and columnist, Jane Bryant Quinn, includes futures in her list of "Some Absolutely Awful Investments."

What are the reasons given? Futures are just financial tools that can be used for a variety of purposes. I don't think it's very useful to just cite an appeal to an authority out of context. Fundamentally I don't think you can make a case that the futures themselves are necessarily or always bad, even outside of the original purpose of hedging commodity price fluctuations for a product you already own. If for example you sit on $200,000 in cash earning 1% and 1 S&P 500 e-mini futures contract (controlling a nominal value of $103,950), you are effectively close to a 50/50 stock/cash allocation and are not even leveraged. It is the usage of high leverage via this instrument that often gets people in trouble and creates some cause for concern with any fund using these things. The effective borrowing cost is a known expense and not that unpredictable in of itself.

My point is that you have to see how the tools are being used and not just what the tools are. Just saying that something is bad won't tell anybody why, in any case.

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Re: Unlimited losses ?

Postby Maynard F. Speer » Tue Jun 09, 2015 12:02 am

Taylor Larimore wrote:
As an investment class, futures are no riskier than any other asset class - such as equities .. They can all experience unlimited losses -

This is incorrect. Investors in a stock mutual fund like Total Stock Market Index Fund will never experience "unlimited losses" unless every corporation in America ceased to exist--which will never happen.

Respected author and columnist, Jane Bryant Quinn, includes futures in her list of "Some Absolutely Awful Investments."

Best wishes.
Taylor

robert88 wrote:I might be nit picking, but something like TSM can't actually go to zero or at least if it does and every publicly traded company of any size in the US goes bankrupt, I probably have much bigger worries than my portfolio.


Well it's happened in stock markets (as lack_ey said) - it's certainly happened in communist nations .. Who knows what could happen in the US in the future, with regards war, debt, governments seizing assets? .. I think for the global futures market to actually go to zero you'd either need (or invoke) the complete collapse of the global financial system

As for "author and columnist" - and not passing any judgement on the lady mentioned - the media tends to do an awful job of understanding or explaining alternative investments .. By its very nature, the media suits a layman's level of understanding and an incredibly short-term perspective, and probably does more to contribute to collective investor losses than all the overpriced mutual funds lumped together
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Re: QSPIX - thoughts on interesting fund

Postby rrppve » Tue Jun 09, 2015 12:10 am

It's interesting that people are so focused on the risks of "unlimited" losses in the context of QSPIX. The vehicle is a) fully hedged, net zero long and net zero short, and b) a mutual fund which limits your losses in an absolute worst case to your investment.
It also is lower volatility than either individual equities or a broad based index equity fund.
Either you are interested in a non-correlated investment vehicle to lower your overall portfolio risk or not. This is not meant to be a substitute for an equity index, or equity/bond portfolio, but rather a complement to it. There are other ways to reduce portfolio risk than simply adding bonds and this is one of them for those that are comfortable with a quantitatively driven, academic based approach.

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Re: QSPIX - thoughts on interesting fund

Postby Johno » Tue Jun 09, 2015 12:21 am

Yesterdaysnews wrote:Perhaps I'm wrong, but I always assumed the "unlimited losses" is just how a short position works, cause theoretically the stock you have to buy back at some point could go up forever. There is no theoretic limit to how high it could go. Unlike a long position where the stock price can only go to zero. Thus a complete loss is possible but not "unlimited" losses.

That's true if you're personally directly short something, it could go to infinity and you'd owe infinity and the person or institution you did the trade with might have recourse to your assets besides whatever you put up as collateral against the short. However if you invest in a fund that's short something, the fund can only be wiped out, institution the fund did the trade with won't have recourse to you. So it is the same maximum theoretical exposure as a long only fund, whatever you put into it.

But I think it's ridiculous to argue *quantitatively* based on the wording of risk disclosures. It's not to get into a tangent debate about the public policy of securities law, but on a practical basis an investor who actually plans to take the risk of an investment should not be dependent on the wording of risk disclosures, but rather have a familiarity with the actual underlying risks and their approximate magnitude.

And what's sauce for the goose... it's no more reasonable to say that 'shorts could lose everything' than 'longs could lose everything', in a fund. In the latter case for a TSM yes it would mean every company going bankrupt and that risk might be negligible. But in a fund like QSPIX 'shorts go to infinity' means that happens while normally closely correlated assets (the currency, bond futures, stocks etc that the fund is long) don't go up much. Then that has to be replicated across a bunch of different short v long positions in different asset classes, so risk of 100% loss is arguably just as negligible in actuality, and more practically sudden big (say 20% in a day 1987 style) losses in QSPIX are probably less likely than in a TSM fund. Then again any reasonable analysis of a fund like QSPIX doesn't consider it a substitute for a lot let alone all of one's equity risk premium exposure anyway...

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Re: QSPIX - thoughts on interesting fund

Postby Maynard F. Speer » Tue Jun 09, 2015 12:48 am

rrppve wrote:Either you are interested in a non-correlated investment vehicle to lower your overall portfolio risk or not. This is not meant to be a substitute for an equity index, or equity/bond portfolio, but rather a complement to it. There are other ways to reduce portfolio risk than simply adding bonds and this is one of them for those that are comfortable with a quantitatively driven, academic based approach.


This is what so much of the investment media tends to fall down on .. I suppose because they need to keep churning it out - if they elucidated modern portfolio theory well and often enough, investors wouldn't need to keep reading silly headlines

Interesting section on the diversification benefits of alternatives on BlackRock's website

Image
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Re: QSPIX - thoughts on interesting fund

Postby Oliver » Tue Jun 09, 2015 5:32 am

DaufuskieNate wrote: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.
I second the recommendation!!

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Re: QSPIX - thoughts on interesting fund

Postby longinvest » Tue Jun 09, 2015 6:17 am

Oliver wrote:
DaufuskieNate wrote: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.
I second the recommendation!!

I read that book*. I didn't find much other than data mining in it. Didn't convince me.

* Didn't have to buy the book; it was available at my public library.
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Re: QSPIX - thoughts on interesting fund

Postby Call_Me_Op » Tue Jun 09, 2015 6:29 am

Yesterdaysnews wrote:Perhaps I'm wrong, but I always assumed the "unlimited losses" is just how a short position works, cause theoretically the stock you have to buy back at some point could go up forever. There is no theoretic limit to how high it could go. Unlike a long position where the stock price can only go to zero. Thus a complete loss is possible but not "unlimited" losses.


Indeed, we need to be careful with wording. The difference between an "unlimited loss" and a "total loss" is not subtle. Most things we invest in can suffer a total loss, at least theoretically. But I would never touch an investment with a risk of unlimited loss (a loss greater than the amount invested).
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Re: QSPIX - thoughts on interesting fund

Postby longinvest » Tue Jun 09, 2015 6:30 am

rrppve wrote:It's interesting that people are so focused on the risks of "unlimited" losses in the context of QSPIX. The vehicle is a) fully hedged, net zero long and net zero short, and b) a mutual fund which limits your losses in an absolute worst case to your investment.

But, the thing is that even a single small short position could sink the whole fund to $0 if things were to go real bad. That's why the SEC requires QSPIX to list this risk in its prospectus.

Contrast this with a Total Stock Market index fund (TSM), where if the biggest position was to go to $0, it wouldn't sink the fund. In other words, if Apple was to go bankrupt, TSM would loose less than 4% in the worst case. If a small position was to go bankrupt, TSM would loose less than 0.01% in the worst case!
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Re: QSPIX - thoughts on interesting fund

Postby longinvest » Tue Jun 09, 2015 6:57 am

rrppve wrote:Either you are interested in a non-correlated investment vehicle to lower your overall portfolio risk or not. This is not meant to be a substitute for an equity index, or equity/bond portfolio, but rather a complement to it. There are other ways to reduce portfolio risk than simply adding bonds and this is one of them for those that are comfortable with a quantitatively driven, academic based approach.

I have to disagree.

If I was to hold 50% of my portfolio in a Total Stock Market index fund (TSM), and 50% in a Total Bond Market index fund (TSM), I would have my biggest single position exposure to loss at less than 2% (Apple going bankrupt)*. The risk exposure would be even lower if I divided my stock allocation between TSM and a Total International Stock Market index fund (TISM).

Contrast this with holding 10% of my portfolio in QSPIX. If a single small short position was to go wild, I could loose 10% of my portfolio. Adding QSPIX to my portfolio would increase the overall risk of my portfolio.

* OK, I'm assuming that the U.S. government won't default on its Treasuries.
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Re: Unlimited losses ?

Postby robert88 » Tue Jun 09, 2015 7:49 am

Maynard F. Speer wrote:
Taylor Larimore wrote:
As an investment class, futures are no riskier than any other asset class - such as equities .. They can all experience unlimited losses -

This is incorrect. Investors in a stock mutual fund like Total Stock Market Index Fund will never experience "unlimited losses" unless every corporation in America ceased to exist--which will never happen.

Respected author and columnist, Jane Bryant Quinn, includes futures in her list of "Some Absolutely Awful Investments."

Best wishes.
Taylor

robert88 wrote:I might be nit picking, but something like TSM can't actually go to zero or at least if it does and every publicly traded company of any size in the US goes bankrupt, I probably have much bigger worries than my portfolio.


Well it's happened in stock markets (as lack_ey said) - it's certainly happened in communist nations .. Who knows what could happen in the US in the future, with regards war, debt, governments seizing assets? .. I think for the global futures market to actually go to zero you'd either need (or invoke) the complete collapse of the global financial system


In that hypothetical scenario, the world market doesn't need to go zero, you just have to have all your assets with US financial custodians for all your assets to go to zero. Even if you have a foreign custodian, as long as you're living in the US, the government could put you in jail until you repatriate your assets. For reasons that would take this thread way OT, I think even with dual citizenship and foreign custodians for all your assets, the US would have a significant chance of being able to seize your assets. Like I said, if TSM actually went to zero, I probably have way bigger problems than my portfolio.

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Re: QSPIX - thoughts on interesting fund

Postby matjen » Tue Jun 09, 2015 7:53 am

longinvest wrote:
rrppve wrote:Either you are interested in a non-correlated investment vehicle to lower your overall portfolio risk or not. This is not meant to be a substitute for an equity index, or equity/bond portfolio, but rather a complement to it. There are other ways to reduce portfolio risk than simply adding bonds and this is one of them for those that are comfortable with a quantitatively driven, academic based approach.

I have to disagree.

If I was to hold 50% of my portfolio in a Total Stock Market index fund (TSM), and 50% in a Total Bond Market index fund (TSM), I would have my biggest single position exposure to loss at less than 2% (Apple going bankrupt)*. The risk exposure would be even lower if I divided my stock allocation between TSM and a Total International Stock Market index fund (TISM).

Contrast this with holding 10% of my portfolio in QSPIX. If a single small short position was to go wild, I could loose 10% of my portfolio. Adding QSPIX to my portfolio would increase the overall risk of my portfolio.

* OK, I'm assuming that the U.S. government won't default on its Treasuries.


This is crazy talk. QSPIX haters can't argue about the theories and why QSPIX may be useful in a factor-based approach, they can't argue about the actual real world performance, so they are left with pulling boilerplate language out of the prospectus and speculating about end of the world scenarios. Laughable. For those interested in how QSPIX may have performed in 2008 and 2002 I present Ronen Israel. AQR examined all of this. And yes, of course, it is back tested. That is all you can do but it is a a heck of a lot better than rank speculation just to spread FUD...fear, uncertainty, and doubt.

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

Postby longinvest » Tue Jun 09, 2015 7:57 am

matjen wrote:This is crazy talk.


Don't accuse me; accuse QSPIX's own prospectus:

Short Sale Risk: The Fund enters into a short sale by selling a security it has borrowed (typically from a broker or other
institution). If the market price of a security increases after the Fund borrows the security, the Fund will suffer a (potentially unlimited) loss when it replaces the borrowed security at the higher price. In certain cases, purchasing a security to cover a AQR Funds short position can itself cause the price of the security to rise further, thereby exacerbating the loss. In addition, the Fund may not always be able to borrow the security at a particular time or at an acceptable price. The Fund may also take a short position in a derivative instrument, such as a future, forward or swap. A short position on a derivative instrument involves the risk of a theoretically unlimited increase in the value of the underlying instrument which could cause the Fund to suffer a (potentially unlimited) loss. Short sales also involve transaction and financing costs that will reduce potential Fund gains and increase potential Fund losses.
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Re: QSPIX - thoughts on interesting fund

Postby matjen » Tue Jun 09, 2015 8:06 am

Like I clearly stated: "so they are left with pulling boilerplate language out of the prospectus and speculating about end of the world scenarios." :oops:
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Re: QSPIX - thoughts on interesting fund

Postby Random Walker » Tue Jun 09, 2015 8:09 am

I believe how QSPIX affects a portfolio depends on where you take assets from to create the position. If you take from the equity side, I believe you would likely keep expected return about the same and likely decrease portfolio volatility. If you take from the bond side, you would increase expected return and increase volatility. In either case, I believe Sharpe ratio increases.

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Re: QSPIX - thoughts on interesting fund

Postby longinvest » Tue Jun 09, 2015 8:14 am

matjen wrote:Like I clearly stated: "so they are left with pulling boilerplate language out of the prospectus and speculating about end of the world scenarios." :oops:

Why does QSPIX put this "boilerplate language" in its prospectus? For marketing purpose? Of course not. It does it because the SEC requires it to.

If it wasn't a real risk of QSPIX, it wouldn't be in its prospectus.
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Re: QSPIX - thoughts on interesting fund

Postby matjen » Tue Jun 09, 2015 8:19 am

longinvest wrote:
matjen wrote:Like I clearly stated: "so they are left with pulling boilerplate language out of the prospectus and speculating about end of the world scenarios." :oops:

Why does QSPIX put this "boilerplate language" in its prospectus? For marketing purpose? Of course not. It does it because the SEC requires it to.

If it wasn't a real risk of QSPIX, it wouldn't be in its prospectus.


However real you think that risk is, it didn't show up in 2002 or 2008. Periods when TSM was down like 40-50%. You are just speculating about unknowns. I will promise you TSM will be down 40% sometime in the future.
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Re: QSPIX - thoughts on interesting fund

Postby Random Walker » Tue Jun 09, 2015 8:24 am

With equity valuations generous and interest rates so low, seems like diversifying into another source of risk and expected return would be very interesting. QSPIX does fit this.

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Re: QSPIX - thoughts on interesting fund

Postby longinvest » Tue Jun 09, 2015 8:29 am

matjen wrote:
longinvest wrote:
matjen wrote:Like I clearly stated: "so they are left with pulling boilerplate language out of the prospectus and speculating about end of the world scenarios." :oops:

Why does QSPIX put this "boilerplate language" in its prospectus? For marketing purpose? Of course not. It does it because the SEC requires it to.

If it wasn't a real risk of QSPIX, it wouldn't be in its prospectus.


However real you think that risk is, it didn't show up in 2002 or 2008. Periods when TSM was down like 40-50%. You are just speculating about unknowns. I will promise you TSM will be down 40% sometime in the future.


You mean: QSPIX's prospectus is just speculating about unknowns.

I didn't write this prospectus!
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Re: QSPIX - thoughts on interesting fund

Postby rrppve » Tue Jun 09, 2015 8:54 am

longinvest wrote:
matjen wrote:
longinvest wrote:
matjen wrote:Like I clearly stated: "so they are left with pulling boilerplate language out of the prospectus and speculating about end of the world scenarios." :oops:

Why does QSPIX put this "boilerplate language" in its prospectus? For marketing purpose? Of course not. It does it because the SEC requires it to.

If it wasn't a real risk of QSPIX, it wouldn't be in its prospectus.


However real you think that risk is, it didn't show up in 2002 or 2008. Periods when TSM was down like 40-50%. You are just speculating about unknowns. I will promise you TSM will be down 40% sometime in the future.


You mean: QSPIX's prospectus is just speculating about unknowns.

I didn't write this prospectus!

The SEC requires the same language whether a fund is short only or long-short market neutral despite the very different risk profiles of the two vehicles.
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Re: QSPIX - thoughts on interesting fund

Postby cheapskate » Tue Jun 09, 2015 9:39 am

It has been less than a decade (2007) since the last Quant meltdown, during which a majority of levered Quant funds got hammered. There is a good book "The Quants" covering this episode. I read it years ago, but don't recall the details.

What are the chances there won't be another quant meltdown ? What are the chances there won't be another episode where both the short and long positions move against AQR (and it's brethren) ?

http://www.nytimes.com/2007/08/18/busin ... wanted=all
http://business.time.com/2007/08/23/a_m ... of_the_gr/

Here is an amusing collection of "Dear valued client" letters from quant managers to their clients.

http://bigpicture.typepad.com/comments/ ... tor--.html

2007 was a year when boring, stodgy Vanguard Lifestrategy Moderate Growth (60/40 allocation) ended the year with a respectable 7.36% return - without giving their valued clients ulcers.

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Re: QSPIX - thoughts on interesting fund

Postby matjen » Tue Jun 09, 2015 9:49 am

cheapskate wrote:It has been less than a decade (2007) since the last Quant meltdown, during which a majority of levered Quant funds got hammered. There is a good book "The Quants" covering this episode. I read it years ago, but don't recall the details.

What are the chances there won't be another quant meltdown ? What are the chances there won't be another episode where both the short and long positions move against AQR (and it's brethren) ?

http://www.nytimes.com/2007/08/18/busin ... wanted=all
http://business.time.com/2007/08/23/a_m ... of_the_gr/

Here is an amusing collection of "Dear valued client" letters from quant managers to their clients.

http://bigpicture.typepad.com/comments/ ... tor--.html

2007 was a year when boring, stodgy Vanguard Lifestrategy Moderate Growth (60/40 allocation) ended the year with a respectable 7.36% return - without giving their valued clients ulcers.


Weird how you left out 2001/2002 and 2008. In 2008 LifeStrategy VSMGX was down 26.5%. QSPIX was down 5% (estimated to be fair). Moreover, you can't just paint the fund with the term "quant" and pretend it is like all other quant funds. It has a very different strategy than most.
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Re: Unlimited losses ?

Postby abuss368 » Tue Jun 09, 2015 9:56 am

Taylor Larimore wrote:
As an investment class, futures are no riskier than any other asset class - such as equities .. They can all experience unlimited losses -

This is incorrect. Investors in a stock mutual fund like Total Stock Market Index Fund will never experience "unlimited losses" unless every corporation in America ceased to exist--which will never happen.

Respected author and columnist, Jane Bryant Quinn, includes futures in her list of "Some Absolutely Awful Investments."

Best wishes.
Taylor


This is why returning to Vanguard many years ago was so easy. There would be no unlimited permanent loss unless every US and International company ceased to exist.

Thank you Jack Bogle!
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Re: QSPIX - thoughts on interesting fund

Postby cheapskate » Tue Jun 09, 2015 10:19 am

matjen wrote:Weird how you left out 2001/2002 and 2008. In 2008 LifeStrategy VSMGX was down 26.5%. QSPIX was down 5% (estimated to be fair). Moreover, you can't just paint the fund with the term "quant" and pretend it is like all other quant funds. It has a very different strategy than most.


1) There were significant drawdowns in 2001/2001 and 2008 for the balanced funds. But as an investor, I know that these funds are un-levered. These funds don't have any short positions. These funds won't go to 0. As the economy recovers, over time, my position will be in the black again. With levered long-short hedge funds, the wipe out to $0 is a very real possibility, and has happened plenty of times in the past.
2) The "strategy" is the issue. After 3 pages of discussions amongst possibly the best investors around, there is no clear idea on what exactly the "strategy" is except that the strategy is go long on assets that will go up and go short on assets that will go down - and implement that with leverage.

It is one thing to long-only tilt towards value and small (the penalty for being wrong there is not catastrophic). It is quite another thing to put 10% or 20% of your assets in a levered long-short quant fund. You are totally at risk of the (data mined) models working in your favor.

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Re: QSPIX - thoughts on interesting fund

Postby nisiprius » Tue Jun 09, 2015 10:21 am

matjen wrote:...pulling boilerplate language out of the prospectus...
No, it isn't boilerplate. That's the whole point. I'm going to bring in Vanguard Managed Payout here because there were similar discussions at the time.

The risk disclosure of, say, Vanguard Managed Payout fund is qualitatively different from that in Vanguard Total Stock Market Fund. In turn, the risk disclosure of QSPIX is qualitatively different from that in Vanguard Managed Payout Fund.

I'm not looking at it now and I didn't look closely at Taylor's posting, but I'm going to see if I can state from memory the risks of Vanguard Total Stock Market Index fund. I'm guessing there are about four: (a) risks of stock market investing; (b) risk of sampling if the fund uses sampling; (c) risk of index tracking error; and possibly (d) risks of cap-weighting, which would be an example of one I think is fictional but is nevertheless one that should be understood. Now I'm going to look at the actual prospectus, just to make sure Taylor got it right and quoted the Statutory Prospectus, and see how close I came. I'll skip the details but in my opinion I got it right. In short: I may not have a deep understanding of them, but I do know the principal risks of the fund.

The dismissive things people are saying about the risks of QSPIX could all have been said about the once-popular 130/30 funds, most of which blew up. In this forum,similar said about Vanguard Managed Payout, a retirement income fund that has a high stock allocation and tries to manage the risk through low correlation, nontraditional assets, and long-short investing within the Market Neutral fund. Defenders said that it was using all the best theory and practice for risk management, the appearance of risk from the high stock allocation was being mostly cancelled out by diversification. As for the long risk section in the Prospectus (longer than most Vanguard funds, shorter than QSPIX) that was just, you know, lawyers.

When push came to shove in 2008-2009 Managed Payout suffered significantly greater losses than Vanguard Balanced Index Fund, which is just a simple rebalanced allocation of 60% Total Stock and 40% Total Bond. In the event, yes indeed, the Managed Payout Fund did have more risk--and to date has failed to recover lost losses.

One could of course say "yes, fancy long-short strategies that rely on low correlation for risk management, are indeed risky for everyone but AQR--but they are not risky for AQR because AQR knows what it is doing. AQR is smart and all the others were stupid." Could be.

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Commodities Futures

Postby Taylor Larimore » Tue Jun 09, 2015 10:24 am

What are the reasons given? Futures are just financial tools that can be used for a variety of purposes. I don't think it's very useful to just cite an appeal to an authority out of context.

Lack_ey:

In her acclaimed book, Making the Most of Your Money, Jane Bryant Quinn devotes six pages to commodities Futures which she calls "A Loser's Game." I recommend her book to anyone who thinks they can win with Futures (except brokers who sell them).

Best wishes.
Taylor
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Re: QSPIX - thoughts on interesting fund

Postby Maynard F. Speer » Tue Jun 09, 2015 10:26 am

longinvest wrote:
rrppve wrote:It's interesting that people are so focused on the risks of "unlimited" losses in the context of QSPIX. The vehicle is a) fully hedged, net zero long and net zero short, and b) a mutual fund which limits your losses in an absolute worst case to your investment.

But, the thing is that even a single small short position could sink the whole fund to $0 if things were to go real bad. That's why the SEC requires QSPIX to list this risk in its prospectus.

Contrast this with a Total Stock Market index fund (TSM), where if the biggest position was to go to $0, it wouldn't sink the fund. In other words, if Apple was to go bankrupt, TSM would loose less than 4% in the worst case. If a small position was to go bankrupt, TSM would loose less than 0.01% in the worst case!


I don't think a single small short position could sink a fund like this .. There was an era of hedge fund which took huge long and short bets - often larger than the portfolio itself - often recklessly, to the point a wrong call could sink a fund or an economy .. Thinking of Soros' Quantum fund

But that level of risk reflected the levels of returns they were targeting - Soros managed 40% annually through the 70s, then 30% annually for the next 2 decades ... Even if this fund had gone to zero, you'd only need it to survive in a portfolio for a few years for it to have paid for itself .. This level of risk was much more rationally targeted than the media would probably have you think

I don't see any reason why a fund targeting market-level returns would need to take on that kind of risk, and why they wouldn't implement basic safeguards .. In principle if you borrow 50 stocks and they go to zero, you just have to pay back what those 50 stocks cost .. Chances are they'd have a stop-loss long before that, and long positions that haven't gone to zero they could comfortably sell out of ... If I'm wrong about this fund, I'd certainly want to know .. But generally (despite the labels) funds using futures and options should be safer
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Re: QSPIX - thoughts on interesting fund

Postby matjen » Tue Jun 09, 2015 10:28 am

nisiprius wrote:
matjen wrote:...pulling boilerplate language out of the prospectus...
No, it isn't boilerplate. That's the whole point. The risk disclosure of, say, Vanguard Managed Payout fund is qualitatively different from that in Vanguard Total Stock Market Fund, and the risk disclosure of QSPIX is qualitatively different from that in Vanguard Managed Payout Fund. I'm not looking at it now and I didn't look closely at Taylor's posting, but I'm going to see if I can state from memory the risks of Vanguard Total Stock Market Index fund. I'm guessing there are about four: (a) risks of stock market investing; (b) risk of sampling if the fund uses sampling; (c) risk of index tracking error; and possibly (d) risks of cap-weighting, which would be an example of one I think is fictional but is nevertheless one that should be understood. Now I'm going to look at the actual prospectus, just to make sure Taylor got it right and quoted the Statutory Prospectus, and see how close I came. Red text is my comments:

The Fund is subject to the following risks, which could affect the Fund’s performance:
• Stock market risk, which is the chance that stock prices overall will decline. So there's (a), stock market risk. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. In addition, the Fund’s target index may, at times, become focused in stocks of a particular market sector, which would subject the Fund to proportionately higher exposure to the risks of that sector.So there's (d), risk of cap-weighting.
• Index sampling risk,which is the chance that the securities selected for the Fund,in the aggregate, will not provide investment performance matching that of the Fund’s target index. Index sampling risk for the Fund should be low. There's (b) and (c).

In short: I may not have a deep understanding of them, but I do know the risks of the fund.

The dismissive things people are saying about the risks of QSPIX could all have been said about the once-popular 130/30 funds, most of which blew up. In this forum, they were all said about Vanguard Managed Payout, a retirement income fund that has a high stock allocation and tries to manage the risk through low correlation, nontraditional assets, and long-short investing within the Market Neutral fund. Defenders said that it was using all the best theory and practice for risk management, the appearance of risk from the high stock allocation was being mostly cancelled out by diversification. As for the long risk section in the Prospectus (longer than most Vanguard funds, shorter than QSPIX) that was just, you know, lawyers.

When push came to shove in 2008-2009 Managed Payout suffered significantly greater losses than Vanguard Balanced Index Fund, which is just a simple rebalanced allocation of 60% Total Stock and 40% Total Bond. In the event, yes indeed, the Managed Payout Fund did have more risk--and to date has failed to recover lost losses.

One could of course say "yes, fancy long-short strategies that rely on low correlation for risk management, are indeed risky for everyone but AQR--but they are not risky for AQR because AQR knows what it is doing. AQR is smart and all the others were stupid." Could be.

Image


Quick response. Straw Man! No one is saying there is no risk in QSPIX and no one is saying that QSPIX is a lock to outperform a beta portfolio (hopeful though :-)). We are saying the risk of it going to zero is, well, about zero. The risk of QSPIX being 10% of a total portfolio is minimal to that portfolio as a whole. EDIT: See Maynard's response above, etc. People are claiming that 1 position will crush QSPIX, etc. This is FUD.
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Re: QSPIX - thoughts on interesting fund

Postby longinvest » Tue Jun 09, 2015 10:40 am

matjen wrote:Quick response. Straw Man! No one is saying there is no risk in QSPIX. We are saying the risk of it going to zero is, well, about zero. The risk of QSPIX being 10% of a total portfolio is minimal to that portfolio as a whole. EDIT: See Maynard's response above, etc. People are claiming that 1 position will crush QSPIX, etc. This is FUD.


You are saying that the prospectus is FUD! The prospectus says:

Short Sale Risk: The Fund enters into a short sale by selling a security it has borrowed (typically from a broker or other
institution). If the market price of a security increases after the Fund borrows the security, the Fund will suffer a (potentially unlimited) loss when it replaces the borrowed security at the higher price. In certain cases, purchasing a security to cover a AQR Funds short position can itself cause the price of the security to rise further, thereby exacerbating the loss. In addition, the Fund may not always be able to borrow the security at a particular time or at an acceptable price. The Fund may also take a short position in a derivative instrument, such as a future, forward or swap. A short position on a derivative instrument involves the risk of a theoretically unlimited increase in the value of the underlying instrument which could cause the Fund to suffer a (potentially unlimited) loss. Short sales also involve transaction and financing costs that will reduce potential Fund gains and increase potential Fund losses.
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Re: QSPIX - thoughts on interesting fund

Postby HomerJ » Tue Jun 09, 2015 10:41 am

backpacker wrote: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"?


This.

Every decade, there's a group of investors who want to feel smart and sophisticated, and every decade there's a new group of managers with a new strategy that will promise equity-like returns without the risk. Marketing gets paid very well to make sure they find each other.

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Re: QSPIX - thoughts on interesting fund

Postby nisiprius » Tue Jun 09, 2015 10:42 am

matjen wrote: People are claiming that 1 position will crush QSPIX, etc. This is FUD
I agree that although a short position involves unlimited losses, I do not think an investor in a mutual fund would be responsible for those losses. I'm pretty sure about that.

(But I find that I am not completely sure why I think so. Conceivably if it didn't act quickly enough, a mutual fund with short positions could find itself with more obligations than assets and have a negative NAV. Does anyone happen to know exactly what provisions of the Investment Company Act of 1940 guarantee that the fund's shareholders aren't obligated for the loss? Who would end up paying? Is this simply an example of shareholders in a limited liability corporation?)
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HomerJ
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Joined: Fri Jun 06, 2008 12:50 pm

Re: QSPIX - thoughts on interesting fund

Postby HomerJ » Tue Jun 09, 2015 10:45 am

rrppve wrote:There are other ways to reduce portfolio risk than simply adding bonds and this is one of them for those that are comfortable with a quantitatively driven, academic based approach.


Every failed strategy in the past was a quantitatively driven, academic based approach.

Here's just ONE example...

LTCM was founded in 1994 by John W. Meriwether, the former vice-chairman and head of bond trading at Salomon Brothers. Members of LTCM's board of directors included Myron S. Scholes and Robert C. Merton, who shared the 1997 Nobel Memorial Prize in Economic Sciences for a "new method to determine the value of derivatives".[3] Initially successful with annualized return of over 21% (after fees) in its first year, 43% in the second year and 41% in the third year, in 1998 it lost $4.6 billion in less than four months following the 1997 Asian financial crisis and 1998 Russian financial crisis requiring financial intervention by the Federal Reserve, with the fund liquidating and dissolving in early 2000.
Last edited by HomerJ on Tue Jun 09, 2015 10:54 am, edited 1 time in total.


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