grok87 wrote:packer16 wrote:
IMO back testing can be misleading and has led many astray in the past. If I am not mistaken this is how one of AQR's funds blew up in the past (folks relying on historical back-tested results). A
As lack_ey points out the backtest for this fund starts in 1990. How could one possibly argue with that? a nice round number to start on.
But i seem to recall there was a somewhat significant event in the market just a few years before that blew up a lot of leveraged funds (and QSPIX is very leveraged IMHO).
Or maybe it's just data availability issues? French library global factor series start in 1990 for a reason too. Some of the contracts don't go back that far.
Many of the components like value and momentum within stocks, other trades, have been explored going far beyond 1990.
Do you have a sense for how such a strategy would have done on Black Monday or are you just throwing things out there? Remember, this is long/short with zero market beta. If long the S&P 500 and short some other markets, that would have been bad, yes, but it can just as well be the other way around. And based on the 2015 annual report, total notional equity index exposure was on the order of $600 million up and down each spread across multiple stock market indexes for a $1.8 billion fund (there are additional long and short exposures for stocks within markets, around the same amount, roughly beta neutral).
There's a considerable amount of leverage overall, but a lot of that is in the form of Eurodollar, 2-year Treasury, and other contracts that honestly do need to be leveraged a lot to make any kind of difference. You're acting as if there are strong directional bets on volatile assets relative to total fund equity, and ignoring the fact that there are shorts on the other side.