QSPIX - thoughts on interesting fund

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
cheapskate
Posts: 705
Joined: Thu Apr 26, 2007 1:05 pm

Re: QSPIX - thoughts on interesting fund

Post by cheapskate » Tue Jun 09, 2015 10:49 am

HomerJ wrote:
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.


Investor collective memories are about a decade. The last Quant bust was 2007. And AQR was at the front and center of that bust. The way my naive brain understands it, in 2007 Quants were short Growth and long Value (with leverage). The markets moved exactly opposite to their positions. Handing them very heavy losses. Nearly 10 years have elapsed, investors have forgotten 2007. So AQR is back in national media, trotting out their strategies, now accessible to the unwashed masses (the world has run out of people willing to pay 2 and 20). Inevitably there will be another blowup, but in the meantime, $10s (maybe $100s) of millions will have been collected in fees.

User avatar
HomerJ
Posts: 10158
Joined: Fri Jun 06, 2008 12:50 pm

Re: QSPIX - thoughts on interesting fund

Post by HomerJ » Tue Jun 09, 2015 10:52 am

matjen wrote: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.


Every strategy in the past that failed, at first, backtested well. That's how people come up with new strategies... They back-test 100 strategies, 99 fail, 1 appears to do really well in the past... They start using that, showing doubters how well it back-tested.

But the next crisis never looks like the last 4 crises (I had to look up the plural of crisis), and the strategy implodes.


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.


I'll repeat what Ronen Israel says above... Note that every crisis is different... Their strategy will apparently work well if 2000 or 2008 repeats...

But the next crisis will NOT be a repeat of 2000 or 2008.
Last edited by HomerJ on Tue Jun 09, 2015 10:56 am, edited 1 time in total.

User avatar
matjen
Posts: 1670
Joined: Sun Nov 20, 2011 11:30 pm

Re: QSPIX - thoughts on interesting fund

Post by matjen » Tue Jun 09, 2015 10:55 am

HomerJ wrote:I'll repeat what Ronen Israel says above... Note that every crisis is different... Their strategy will apparently work well if 2000 or 2008 repeats...

But the next crisis will NOT be a repeat of 2000 or 2008.


Certainly true. It is senseless to argue about the unknown future. Implicit in your response though is that somehow equities and bonds are also not subject to this universal truth...they are.
A man is rich in proportion to the number of things he can afford to let alone.

User avatar
Ketawa
Posts: 1839
Joined: Mon Aug 22, 2011 1:11 am
Location: Norfolk

Re: QSPIX - thoughts on interesting fund

Post by Ketawa » Tue Jun 09, 2015 11:14 am

longinvest wrote:
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.


Taking excerpts from the prospectus without the appropriate context is promoting FUD. I have held short positions before and I documented it in this thread on writing naked calls to generate TLH opportunities. Anyone who understands how options work would never claim that I exposed myself to unlimited losses even though I held a naked short position.

QSPIX is doing something similar. There is obviously plenty of risk with QSPIX, but you shouldn't be surprised that pulling these sections from the prospectus isn't going to sway anyone.

longinvest
Posts: 2447
Joined: Sat Aug 11, 2012 8:44 am

Re: QSPIX - thoughts on interesting fund

Post by longinvest » Tue Jun 09, 2015 11:39 am

Ketawa wrote:Taking excerpts from the prospectus without the appropriate context is promoting FUD.


There was sufficient context provided in this complete thread and in Taylor's initial excerpt from the prospectus.

Ketawa wrote:I have held short positions before and I documented it in this thread on writing naked calls to generate TLH opportunities. Anyone who understands how options work would never claim that I exposed myself to unlimited losses even though I held a naked short position.

That's a big claim if by "anyone" you actually mean "everyone". It would mathematically be very easy to prove your statement wrong; it would take a single person who understands how options work disagreeing with you.

Your risk tolerance is obviously much higher than mine. I would never write naked calls.
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VAB/ZRR

lack_ey
Posts: 5548
Joined: Wed Nov 19, 2014 11:55 pm

Re: QSPIX - thoughts on interesting fund

Post by lack_ey » Tue Jun 09, 2015 11:52 am

cheapskate wrote:
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.

If you're wondering about the theoretical justification for security selection and the styles, it's all in the literature and has largely been implemented in real funds for decades. For example, 1/4 of it is value investing. Surely we don't need to go back all the way to Graham/Dodd or more closely Fama/French?

Long/short implementations of styles go way back to Fama/French and before. Recall that the decomposition of returns is by market minus risk free, small minus big, high minus low. Small minus big means long small stocks, short large stocks. High minus low is long value, short growth. You can look at Kenneth French's dataset for how diversified baskets of these long/short strategies would have performed in equities (before trading costs/implementation issues, which is the huge caveat), over the decades.

In any case, there are real risks from the long/short implementation. The upside is actually removing the market beta and having much lower correlation. With long-only tilts you still get much of the same behavior as the market itself. With the long/short you can use a much smaller amount and have something to rebalance with. For example, instead of 40% market equities, 20% tilted equities, 40% bonds, then something like 57% market equities, 5% long/short styles, 38% bonds is possible probably with higher Sharpe. The fund is not going to blow up from a few short positions going sour, and even if it did, it's only that 5% of the portfolio or however much you have to allocate to it to get the desired exposure.

And this fund in particular is long/short in much more than just equities and in multiple styles. Also, the amount of leverage is cause for concern, but it's targeting levels and volatility far below the spectacular failures of the past. I fully expect more quant meltdowns in the future and models to go wrong, but everything is a matter of degree. More leverage is used on less volatile assets than on volatile ones like stocks, so not all leverage is created equal and is equally dangerous.

As a minor curiosity, Vanguard's market neutral fund appears to be over 4000% short and 4000% long in individual stocks. Now that has the potential to blow up when bets are wrong. (as an additional aside, the 2008/2009 loss of 20% or more was with the old management team... of course)
edit: checking the Vanguard fund's filings, I think it's more likely that Morningstar is confused than that it's really that leveraged.

HomerJ wrote:
matjen wrote: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.


Every strategy in the past that failed, at first, backtested well. That's how people come up with new strategies... They back-test 100 strategies, 99 fail, 1 appears to do really well in the past... They start using that, showing doubters how well it back-tested.

But the next crisis never looks like the last 4 crises (I had to look up the plural of crisis), and the strategy implodes.

I agree in principle, but the core strategies here are nothing new, just a combination of old existing styles across as many asset classes as possible. There are always data mining and out-of-sample concerns, and I have them too here. But unless you would take Bogle's stance on say value not working in the long run, there's not much to dispute at a high level. The empirical evidence for the other styles may actually be stronger.

So what's "new" here is just combining all these things together, targeting certain risk levels (i.e. adjusting leverage amount) for each style/asset combination for a total target standard deviation of 10%. In practice, this will not work as well as it did in the backtest if
(1) a style has greater volatility or lower returns than in the past (i.e. lower Sharpe)
(2) the correlation between styles goes up

I think (2) is a relatively remote concern except possibly in a crisis type of scenario, and probably not even then. For example, there is a lot of evidence for value and momentum having negative correlation. An argument against the fund would more have to be (1), in which case you're arguing against a whole lot more than just AQR regarding the way the world (probably? usually?) works. Again, I think these concerns are justified, but representing this as "com[ing] up with new strategies" is not very fair.

Again, it should be pointed out that the raw returns using the most basic definitions of the styles, e.g. price/book for value and restricting only to more liquid stocks (i.e. not getting value or momentum in small stocks), were on the order of 17.4% over the risk-free rate for 23-24 years. Clearly, transaction costs eat into the actual returns, and these four styles were chosen (and not others) because these happened to work well over the period. But I'm not sure you can call data mining all the way to this thing not earning money in practice.


Taylor Larimore wrote:
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

Taylor, I will have to look for this book then, thanks.

For the time being, I will also just note that the fund we're talking about has long and short positions in futures contracts in much more than commodities.

But for commodities futures in general, that's pretty much the only way any fund has exposure to commodities. The vast majority (perhaps all but certain gold funds, if you count that) roll futures contracts and do not attempt the cost of storing commodities themselves. So a commodity fund, as used by say Blackrock's LifePath target date series, as recommended by Larry Swedroe in some posts here and books, as described in sample allocations by Christine Benz at Morningstar:
http://news.morningstar.com/articlenet/ ... ?id=672743

would be long commodities futures. Leveraged discretionary speculation is almost always a bad idea. Any and all uses have their own risks, like any other investment.
Last edited by lack_ey on Tue Jun 09, 2015 3:42 pm, edited 1 time in total.

User avatar
Ketawa
Posts: 1839
Joined: Mon Aug 22, 2011 1:11 am
Location: Norfolk

Re: QSPIX - thoughts on interesting fund

Post by Ketawa » Tue Jun 09, 2015 12:42 pm

longinvest wrote:
Ketawa wrote:I have held short positions before and I documented it in this thread on writing naked calls to generate TLH opportunities. Anyone who understands how options work would never claim that I exposed myself to unlimited losses even though I held a naked short position.

That's a big claim if by "anyone" you actually mean "everyone". It would mathematically be very easy to prove your statement wrong; it would take a single person who understands how options work disagreeing with you.

Your risk tolerance is obviously much higher than mine. I would never write naked calls.


I wrote naked calls against EFA (iShares MSCI EAFE ETF, following the MSCI EAFE Index) while holding long positions of VEA (Vanguard FTSE Developed Markets ETF, at the time it also followed the MSCI EAFE Index) and SCHF (Schwab International Equity ETF, following the FTSE Developed ex-U.S. Index).

If you can explain how EFA would rise an unlimited amount while VEA or SCHF fall, I'm all ears.

Any fund that did the same thing would have a statement in its prospectus about being exposed to unlimited losses. There wouldn't be any risk of it, however.

User avatar
Maynard F. Speer
Posts: 2139
Joined: Wed Mar 18, 2015 10:31 am

Re: QSPIX - thoughts on interesting fund

Post by Maynard F. Speer » Tue Jun 09, 2015 12:45 pm

longinvest wrote:
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.


There's no asset class I'm aware of that can't experience potentially unlimited losses ..

Obviously for a short position to experience an infinite loss would require the shorted security to experience an infinite rise (at least to the point it bankrupts the fund) .. But it would also require that none of the managers consider it worth selling out of or hedging the short position on the way

But there are also worst-case-scenarios in which bond funds can go bust, when capital flight forces them to sell at huge losses .. Likewise investment firms and brokers .. So perhaps don't bet the whole house on a fund like QSPIX, but a 10% allocation sounds reasonable (and I'm sure in most universes would more likely improve risk-adjusted returns)
Last edited by Maynard F. Speer on Tue Jun 09, 2015 12:49 pm, edited 2 times in total.
"Economics is a method rather than a doctrine, an apparatus of the mind, a technique of thinking, which helps its possessor to draw correct conclusions." - John Maynard Keynes

Dulocracy
Posts: 2253
Joined: Wed Feb 27, 2013 1:03 pm
Location: Atlanta, GA

Re: QSPIX - thoughts on interesting fund

Post by Dulocracy » Tue Jun 09, 2015 12:46 pm

The fund looks interesting. After reading through some pretty passionate discussion (I though Boglehead investing was boring), I am interested in this fund. Interested is the limit. I like the idea a lot. Larry Swedroe is a really smart guy, and I respect what he says. However, I will not be investing in the fund because:

1) I do not fully understand it.
2) I already have a written investment strategy that does not include this category of investment.
3) I have a written investment strategy that excludes this fund based on its expense ratio.
4) I am not willing to gamble on a new strategy that is untested with such a large expense ratio, notwithstanding the written investment policy.
5) If I did decide to play a risky move, I would not do so in my retirement accounts. This fund is not at all tax friendly. Therefore, it is not the fund for me.

Counter-point: I am relatively young. If I was approaching retirement, I would possibly consider this strategy despite the above. I would only risk what I could afford to go to zero, however, and no more than 10% of my total portfolio. It is an interesting fund. I considered it when Larry Swedroe first posted on it. After thinking it through, I have finally come to this conclusion. I hope it works for those that use it, though!
I'm not a financial professional. Post is info only & not legal advice. No attorney-client relationship exists with reader. Scrutinize my ideas as if you spoke with a guy at a bar. I may be wrong.

User avatar
Yesterdaysnews
Posts: 424
Joined: Sun Sep 14, 2014 1:25 pm

Re: QSPIX - thoughts on interesting fund

Post by Yesterdaysnews » Tue Jun 09, 2015 2:47 pm

Investors do far riskier stuff on their own than investing in a fund like this. Just look at all the market timing threads in this forum. While there is certainly some risk in the AQR approach, most investors out there trying to time the market etc probably will do much worse than someone looking to diversify a global index equity and total bond index strategy with a reasonable allocation to this fund in a tax-deferred account imo.

User avatar
HomerJ
Posts: 10158
Joined: Fri Jun 06, 2008 12:50 pm

Re: QSPIX - thoughts on interesting fund

Post by HomerJ » Tue Jun 09, 2015 3:05 pm

Yesterdaysnews wrote:Investors do far riskier stuff on their own than investing in a fund like this. Just look at all the market timing threads in this forum. While there is certainly some risk in the AQR approach, most investors out there trying to time the market etc probably will do much worse than someone looking to diversify a global index equity and total bond index strategy with a reasonable allocation to this fund in a tax-deferred account imo.


The whole point of this forum to keep people from doing bad moves like market timing or paying 1.5% in fees for active management just because people think the managers are "real smart guys with a backtested strategy"
Last edited by HomerJ on Tue Jun 09, 2015 3:59 pm, edited 1 time in total.

lack_ey
Posts: 5548
Joined: Wed Nov 19, 2014 11:55 pm

Re: QSPIX - thoughts on interesting fund

Post by lack_ey » Tue Jun 09, 2015 3:28 pm

HomerJ wrote:
Yesterdaysnews wrote:Investors do far riskier stuff on their own than investing in a fund like this. Just look at all the market timing threads in this forum. While there is certainly some risk in the AQR approach, most investors out there trying to time the market etc probably will do much worse than someone looking to diversify a global index equity and total bond index strategy with a reasonable allocation to this fund in a tax-deferred account imo.


The whole point of this forum to keep people from doing dumb moves like market timing or paying 1.5% in fees for active management just because people think the managers are "real smart guys with a backtested strategy"

The point of avoiding active management is to pay less in taxes in a taxable account from turnover, pay less inside a fund from transaction fees, avoid asset style drift and changing implementations from different managers over time, and not pay a manager for exposure to assets you can get elsewhere cheaper. This is why when there's something like an actively managed Vanguard muni bond fund with an ER of 0.12%, it is a fine investment despite (or because of?) being active.

Here we have very high frictions from transactions costs as well as very high manager fees. As I keep saying, people are underestimating the hurdle that needs to be overcome by focusing on the 1.5% ER. It's higher than that.

But you can't replicate most of these exposures in any single alternative fund, active or passive. You certainly can't run this yourself because the underlying futures contract sizes and the number of securities to track are too large. Most of the strategies, at least in fully hedged formats, may be found more in hedge funds where you're paying even more. Well, you can get the momentum exposure with a managed futures mutual fund with an ER in the 1% range, but this is just one piece. Vanguard's new alternative strategies fund costs 1.1% but also doesn't have the same kind of exposures and seems to be a lot less open about the process and research.

You can't look at the cost and analyze this in the same framework as you would an actively managed stock fund with long-only exposure to stock and cash, market timing in and out of cash and stocks. If that has an ER of even 0.3%, that is something you can largely own with a mixture of other cheaper funds.

That doesn't at all mean that all kinds of alternatives funds are worth the costs. Most probably aren't. Maybe this one isn't. But you're going nowhere with an argument that doesn't address the concerns that would matter for someone considering this. See the previous response.
Last edited by lack_ey on Tue Jun 09, 2015 3:33 pm, edited 1 time in total.

countmein
Posts: 404
Joined: Fri Dec 06, 2013 9:10 pm

Re: QSPIX - thoughts on interesting fund

Post by countmein » Tue Jun 09, 2015 3:30 pm

QMNIX (basically the equity-only version of QSPIX) gets overlooked but I think is also worth considering... slightly cheaper, slightly lower volatility, slightly easier to comprehend. Like QSPIX has performed well since inception (less than a year, FWIW).

Cost per unit of factor exposure is close to what you get with say DFA core funds with added benefit (or caveat) of short side exposure and MOM exposure.

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

Re: QSPIX - thoughts on interesting fund

Post by robert88 » Tue Jun 09, 2015 6:26 pm

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.


If we want to know how AQR would have done using factor investing in 2008, why don't we look at how AQR did using factor investing in 2008. Their flagship hedge fund Absolute Return lost 45%, while the S&P 500 lost 39%. I'm sure AQR was betting on value and momentum in 2008, so what is QSPIX doing differently? I don't really understand the carry trade, but believe it has been widely known and bet on by Wall Street for decades? Is defensive the new "secret sauce" that Asness didn't know about in 2008?

lack_ey
Posts: 5548
Joined: Wed Nov 19, 2014 11:55 pm

Re: QSPIX - thoughts on interesting fund

Post by lack_ey » Tue Jun 09, 2015 7:04 pm

robert88 wrote:
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.


If we want to know how AQR would have done using factor investing in 2008, why don't we look at how AQR did using factor investing in 2008. Their flagship hedge fund Absolute Return lost 45%, while the S&P 500 lost 39%. I'm sure AQR was betting on value and momentum in 2008, so what is QSPIX doing differently? I don't really understand the carry trade, but believe it has been widely known and bet on by Wall Street for decades? Is defensive the new "secret sauce" that Asness didn't know about in 2008?

Do you know the amount of leverage and exact strategies used? A lot of times the hedge funds with really bad results are just leveraged up the gills with return objectives way higher than stocks. From what I can find the losses include more traditional hedge fund areas like convertible arbitrage. In any case, I have no money in this game and am just curious how things played out and why, if anybody's got the details.

For one thing, currency carry famously crashed in 2008. I'm not sure where to find great data there but here is some:
http://www.nber.org/papers/w15523.pdf

Momentum had a historic collapse in 2009, but you said 2008 (unless you include 2009 with that). Kenneth French's data set shows momentum in stocks (up minus down) as -83.02 in 2009. LOL. That's basically what happens when you're short financials and they bounce back. But in 2008 both value and momentum were about flat in stocks. In other asset classes, it doesn't seem like much there.

I think AQR's mutual funds even these days do not net hedge by industry when doing long/short strategies, so there are definitely potentials for losses when one sector tanks.

They ran a number of hedge funds and it's hard to tell what strategy is run in each. Obviously this is difficult to find on public record compared to mutual funds. It is very possible that some are quite down while others are up.

An optimist here might say that quant approaches and models improve over time, that risk management procedures become more sophisticated and there are things that Asness and his merry band know now that they weren't so good at before. Those with a more skeptical bent on the issue would just say that they have more data to data mine and won't fall for the same mistake twice, the problem being that the same conditions never quite repeat so the recalibration is useless. Personally I suspect that the models—but more so, the processes of actual management—get better over time, just in a limited capacity.

I think a relative strength of the style premia fund is the number of strategy/asset class combinations. A skeptic would mainly see more opportunities for shorts to go bad (and long positions bad, to be honest) and too much deviation from the majesty of simplicity, but IMHO if you're going to let a quant run amok with your money, you better shove it in as many baskets as possible. countmein brought up the equity market neutral fund. I disagree there—you want all the exposures and hope some of them work.

User avatar
HomerJ
Posts: 10158
Joined: Fri Jun 06, 2008 12:50 pm

Re: QSPIX - thoughts on interesting fund

Post by HomerJ » Tue Jun 09, 2015 7:29 pm

robert88 wrote:
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.


If we want to know how AQR would have done using factor investing in 2008, why don't we look at how AQR did using factor investing in 2008. Their flagship hedge fund Absolute Return lost 45%, while the S&P 500 lost 39%. I'm sure AQR was betting on value and momentum in 2008, so what is QSPIX doing differently? I don't really understand the carry trade, but believe it has been widely known and bet on by Wall Street for decades? Is defensive the new "secret sauce" that Asness didn't know about in 2008?


This is a really good point...

I guarantee that AQR backtested their strategy for Absolute Return... I bet their marketing materials in 2006 touted how their strategy would only have been down 10% in 2000-2002, so invest with us!

And then they discovered that the crisis in 2008 wasn't anything like the ones before... and their strategy fell apart.

And now they have a NEW fund, that they've backtested well against 2000 and 2008, only the next crisis won't be anything like 2000 or 2008, and their strategy (whatever it is), may not work well in the NEXT crisis. You just don't know...

Seriously... You guys are all over a brand-new fund with no track record, but devised by the same company that has failed in the past, yet you seem pretty certain that THIS time, the geniuses at AQR will do it right, and those of us who are against it, just don't understand it well enough.

lack_ey
Posts: 5548
Joined: Wed Nov 19, 2014 11:55 pm

Re: QSPIX - thoughts on interesting fund

Post by lack_ey » Tue Jun 09, 2015 8:06 pm

HomerJ wrote:
robert88 wrote:
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.


If we want to know how AQR would have done using factor investing in 2008, why don't we look at how AQR did using factor investing in 2008. Their flagship hedge fund Absolute Return lost 45%, while the S&P 500 lost 39%. I'm sure AQR was betting on value and momentum in 2008, so what is QSPIX doing differently? I don't really understand the carry trade, but believe it has been widely known and bet on by Wall Street for decades? Is defensive the new "secret sauce" that Asness didn't know about in 2008?


This is a really good point...

I guarantee that AQR backtested their strategy for Absolute Return... I bet their marketing materials in 2006 touted how their strategy would only have been down 10% in 2000-2002, so invest with us!

For what it's worth, if it loaded on value and momentum, it probably should have made a bunch of money in 2000-2002 (good times for value). In any case, a lot of strategies and asset classes did pretty well through the period, just not the broad cap-weighted equities because tech exploded.

Anyway, like I said earlier, I think the expectation should be that there are situations in the future that people haven't thought up, and models of the world are always fragile. There will likely be losses at times that quant managers don't expect, that fall outside of what "should" happen with certain likelihoods. So at a very high level I am in agreement on this issue.

HomerJ wrote:And then they discovered that the crisis in 2008 wasn't anything like the ones before... and their strategy fell apart.

No strategy works all the time. Stocks only beat cash about 60% of months. The standard should be long-run performance. Though for something supposed to be diversified from stocks, you would not like them to crash with stocks, whether there's explicit market beta or something else that might crash when equities do.

HomerJ wrote:And now they have a NEW fund, that they've backtested well against 2000 and 2008, only the next crisis won't be anything like 2000 or 2008, and their strategy (whatever it is), may not work well in the NEXT crisis. You just don't know...

Yes, the only hope is doing more often better than not. But really, though you have to say this about any strategy, there are some backtests that deserve greater skepticism than others when it comes to performance during crashes. One that does not net invest in the things that are going down during crashes should not be expected to go down too. Something like a moving-average signal for moving out of the market (that would have worked in 2000, 2008) is on much more tenuous ground, for example.

I think a clear point to make is that there is nothing much about crash avoidance in any of the styles used in the style premia fund. (that said, it does scale bets based on recent volatility, which has historically helped for at least momentum, I know) The crash protection is not so much protection as indifference to the direction of the market. The assets aren't supposed to move with the stock markets, be the direction up or down.

HomerJ wrote:Seriously... You guys are all over a brand-new fund with no track record, but devised by the same company that has failed in the past, yet you seem pretty certain that THIS time, the geniuses at AQR will do it right, and those of us who are against it, just don't understand it well enough.

You seem to have not addressed all my previous points and those of others. You also seem to be ignoring the available longer-run performance of Absolute Return. Again, I don't know the risk level taken by the strategy, correlation with stocks, or any other relevant measures, but a Forbes article from 2011 indicates a 16-year annualized return of 10.8% after fees. If that's with 50% annual standard deviation and high correlation to stocks, that's terrible. If it's with even 30% annual standard deviation and low or moderate (though Asness is a proponent of fully hedging, so I expect closer to zero) correlation, then that may have been worthwhile. Stocks returned 6.8% annualized over the period, for reference. Obviously there's survivorship bias in any example we point out here. We're not discussing a hypothetical fund by the guy who lost a bunch of money and never made it in the biz.

Personally, I am surprised that the angle of attack against the style premia fund hasn't also gone in certain other ways, as I can think of other reasons to dislike what's going on that haven't been much of the focus. I am waiting to see if people will bring them up; if not, I'll mention them later.

User avatar
backpacker
Posts: 1620
Joined: Mon Sep 22, 2014 2:17 pm

Re: QSPIX - thoughts on interesting fund

Post by backpacker » Tue Jun 09, 2015 8:31 pm

HomerJ wrote:
Yesterdaysnews wrote:Investors do far riskier stuff on their own than investing in a fund like this. Just look at all the market timing threads in this forum. While there is certainly some risk in the AQR approach, most investors out there trying to time the market etc probably will do much worse than someone looking to diversify a global index equity and total bond index strategy with a reasonable allocation to this fund in a tax-deferred account imo.


The whole point of this forum to keep people from doing bad moves like market timing or paying 1.5% in fees for active management just because people think the managers are "real smart guys with a backtested strategy"


Even if all we're doing is backtesting, it's unclear what QSPIX has to offer. Robert T showed earlier that a portfolio long small-value historically had higher returns with no more risk than a portfolio with QSPIX. And that was before fees.

Robert T wrote: 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
Last edited by backpacker on Tue Jun 09, 2015 8:32 pm, edited 1 time in total.

User avatar
backpacker
Posts: 1620
Joined: Mon Sep 22, 2014 2:17 pm

Re: QSPIX - thoughts on interesting fund

Post by backpacker » Tue Jun 09, 2015 8:32 pm

lack_ey wrote: Personally, I am surprised that the angle of attack against the style premia fund hasn't also gone in certain other ways, as I can think of other reasons to dislike what's going on that haven't been much of the focus. I am waiting to see if people will bring them up; if not, I'll mention them later.


Now I'm curious. :happy

User avatar
matjen
Posts: 1670
Joined: Sun Nov 20, 2011 11:30 pm

Re: QSPIX - thoughts on interesting fund

Post by matjen » Tue Jun 09, 2015 8:34 pm

lack_ey wrote:For what it's worth, if it loaded on value and momentum, it probably should have made a bunch of money in 2000-2002 (good times for value). In any case, a lot of strategies and asset classes did pretty well through the period, just not the broad cap-weighted equities because tech exploded.


LOL. In HomerJ's worldview Vanguard's strategy "fell apart" and "failed." Why would you ever think of perhaps putting 5-10% of your total portfolio to work with them in a related but certainly different strategy.
A man is rich in proportion to the number of things he can afford to let alone.

User avatar
matjen
Posts: 1670
Joined: Sun Nov 20, 2011 11:30 pm

Re: QSPIX - thoughts on interesting fund

Post by matjen » Tue Jun 09, 2015 8:39 pm

backpacker wrote:
lack_ey wrote: Personally, I am surprised that the angle of attack against the style premia fund hasn't also gone in certain other ways, as I can think of other reasons to dislike what's going on that haven't been much of the focus. I am waiting to see if people will bring them up; if not, I'll mention them later.


Now I'm curious. :happy


I would say that Robert T. had a balanced review earlier that reached a conclusion that you can get the factor loads desired in a less expensive and complicated manner by just being long (and tilted to factors) if your assets are situated in tax sheltered accounts. If the vast majority of your assets are not tax sheltered and you would have to sell say VTI or VXUS then QSPIX may make sense in order to get you factors per $$. That's my take.
A man is rich in proportion to the number of things he can afford to let alone.

User avatar
backpacker
Posts: 1620
Joined: Mon Sep 22, 2014 2:17 pm

Re: QSPIX - thoughts on interesting fund

Post by backpacker » Tue Jun 09, 2015 8:51 pm

HomerJ wrote: And now they have a NEW fund, that they've backtested well against 2000 and 2008, only the next crisis won't be anything like 2000 or 2008, and their strategy (whatever it is), may not work well in the NEXT crisis. You just don't know...


This may express some of my discontent with using factor bets to add "diversification" or "safety" to a portfolio. Bill Bernstein think that value stocks have had higher returns in the past because they are more likely to have bad returns in bad times. Value risk is compensated risk precisely because it shows up when you least want it to show up. But if that's right, then the last thing you want to do is rely on a long-short value fund to add "safety" to your portfolio. Yes, it will provide diversification during good times. But who cares about good times? I want things that will hold their own at the bottom of a bear market. Maybe value can do that. Maybe not. Bill Bernstein thinks not.

I tilt to value stocks, but think of it more as a cheap form of leverage than a way of adding safety to my portfolio. I expect it to increase the risk of my portfolio. If it happens to decrease the risk, I'll be pleasantly surprised.

User avatar
matjen
Posts: 1670
Joined: Sun Nov 20, 2011 11:30 pm

Re: QSPIX - thoughts on interesting fund

Post by matjen » Tue Jun 09, 2015 9:02 pm

backpacker wrote:
HomerJ wrote: And now they have a NEW fund, that they've backtested well against 2000 and 2008, only the next crisis won't be anything like 2000 or 2008, and their strategy (whatever it is), may not work well in the NEXT crisis. You just don't know...


This may express some of my discontent with using factor bets to add "diversification" or "safety" to a portfolio. Bill Bernstein think that value stocks have had higher returns in the past because they are more likely to have bad returns in bad times. Value risk is compensated risk precisely because it shows up when you least want it to show up. But if that's right, then the last thing you want to do is rely on a long-short value fund to add "safety" to your portfolio. Yes, it will provide diversification during good times. But who cares about good times? I want things that will hold their own at the bottom of a bear market. Maybe value can do that. Maybe not. Bill Bernstein thinks not.

I tilt to value stocks, but think of it more as a cheap form of leverage than a way of adding safety to my portfolio. I expect it to increase the risk of my portfolio. If it happens to decrease the risk, I'll be pleasantly surprised.



A pure value factor tilt is not meant to provide safety to a portfolio and QSPIX isn't a pure value play. I think we are getting far afield here.
A man is rich in proportion to the number of things he can afford to let alone.

lack_ey
Posts: 5548
Joined: Wed Nov 19, 2014 11:55 pm

Re: QSPIX - thoughts on interesting fund

Post by lack_ey » Tue Jun 09, 2015 9:24 pm

backpacker wrote:
lack_ey wrote: Personally, I am surprised that the angle of attack against the style premia fund hasn't also gone in certain other ways, as I can think of other reasons to dislike what's going on that haven't been much of the focus. I am waiting to see if people will bring them up; if not, I'll mention them later.


Now I'm curious. :happy

Don't get too excited. They're not very theoretical and for all we know, I forget about them by tomorrow or whoever knows when.

Actually, so I don't forget, let me just say one: counterparty risk. It was part of the quote chain a while back from the prospectus risks, but nobody really ran with it. The swaps, futures, and forwards (of which there are a looot) have Barclays, Bank of America, Goldman Sachs, Citibank, J.P. Morgan, Credit Suisse, etc. as the counterparties. Not to mention that the derivatives market is larger than ever. That part was brought up briefly. But in any case, a real panic in this space could make trading a lot costlier here. There could always be a worse financial crisis than the last one. No guarantees.

backpacker wrote:Even if all we're doing is backtesting, it's unclear what QSPIX has to offer. Robert T showed earlier that a portfolio long small-value historically had higher returns with no more risk than a portfolio with QSPIX. And that was before fees.

Robert T wrote: 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

First of all, Robert T seems to have missed the fact that the 30% there is not AQR style equity but long/short factor exposure across multiple asset classes. Or at least, it's not apparently clear from seeing that, so we should be careful to at least categorize this correctly.

As for the results, recall that this was a pretty strong period for Treasuries, especially when combined with equities. This was also a strong period for the four styles used by AQR, yes, but at least with bonds we know that a repeat is pretty much impossible given current yields. Furthermore, the AQR style premia results quoted are already arbitrarily discounted downward compared to the raw simulation returns net of estimated transaction costs, to allay concerns of data mining and unusual results over this period being unlikely to continue going forward. (i.e. the raw returns are way better in the backtest than the numbers being used for the table that Robert T quoted) Then note the investability and transaction costs for global small value over the period.

Furthermore, I'd go back to my previous point about giving money to quants. If you're going to do it, you may as well pay to get every trick in the book in hopes that some of them will work. If small, value, or the combination of small and value don't work in equities, you're out of luck. If currency carry and momentum in equities don't work, maybe carry still works in bonds and momentum in commodities. And defensive, value, and everything else.

In addition, note that the correlation between the long/short premia strategy and value (though I think this means value across asset classes and not just stocks) was 0.12. If you're convinced small value plus Treasuries is the way to go, this strategy still should have low correlation to everything in there! Why not make it something like 38% global small value, 52% 5-yr T-notes, and 10% style premia? The low correlation between the style premia and value itself is evidence that there is "unique factor exposure" that the Larry-style allocation doesn't already have.

That is, of course, just playing the backtest game and supposing these factor things aren't all just spurious in the first place.

backpacker wrote:
HomerJ wrote: And now they have a NEW fund, that they've backtested well against 2000 and 2008, only the next crisis won't be anything like 2000 or 2008, and their strategy (whatever it is), may not work well in the NEXT crisis. You just don't know...


This may express some of my discontent with using factor bets to add "diversification" or "safety" to a portfolio. Bill Bernstein think that value stocks have had higher returns in the past because they are more likely to have bad returns in bad times. Value risk is compensated risk precisely because it shows up when you least want it to show up. But if that's right, then the last thing you want to do is rely on a long-short value fund to add "safety" to your portfolio. Yes, it will provide diversification during good times. But who cares about good times? I want things that will hold their own at the bottom of a bear market. Maybe value can do that. Maybe not. Bill Bernstein thinks not.

I tilt to value stocks, but think of it more as a cheap form of leverage than a way of adding safety to my portfolio. I expect it to increase the risk of my portfolio. If it happens to decrease the risk, I'll be pleasantly surprised.

The Fama angle would be that value stocks are riskier, yes. Remember that value stocks have both market beta and value exposure, if you play their decomposition game.

From the factor investing point of view, it might be better to substitute a portfolio of 0.6 market beta (say 60% stocks, 40% bonds) with say 0.4 market beta, 0.2 HML, 0.2 SMB (say 40% small value, 60% bonds) in hopes that these extra factors provide sources of return that are less correlated with market beta than simply adding more stocks. If you can find an allocation that delivers the same return using less market beta, it is in some sense more diversified. In reality, it's concentrated in a certain type of stock, but it is more diversified by factor exposure for those who believe in that.

From another point of view, for an equivalent level of returns, you use riskier stocks but less of them. That will help cut down left tails, probably. The way you've formulated it is more risk and more return, but if you scale back the risk, you should be looking at more return for the same risk or less risk for the same return.

The style premia fund is a way to add all these other styles without adding market beta. If these styles deliver positive returns after fees and trading costs, then you have a source of returns (largely? supposed to be) uncorrelated from both stocks and bonds. This is a very good thing by any analysis. It means that you can use this different source of return to dial down the risk taken in other parts of the portfolio.

countmein
Posts: 404
Joined: Fri Dec 06, 2013 9:10 pm

Re: QSPIX - thoughts on interesting fund

Post by countmein » Tue Jun 09, 2015 10:06 pm

lack_ey wrote:
backpacker wrote:Even if all we're doing is backtesting, it's unclear what QSPIX has to offer. Robert T showed earlier that a portfolio long small-value historically had higher returns with no more risk than a portfolio with QSPIX. And that was before fees.

Robert T wrote: 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

First of all, Robert T seems to have missed the fact that the 30% there is not AQR style equity but long/short factor exposure across multiple asset classes. Or at least, it's not apparently clear from seeing that, so we should be careful to at least categorize this correctly.


Actually looks like Robert T is in fact using the results from the AQR paper regarding multi-asset style premia. However, for the 40% global small/value (.2/.4 smb/hml): 60% 5 year notes portfolio, I get 8.0/6.8/0.69 Return/SD/Sharpe for the same period, which is a little bit behind the style premia portfolio. And, as lack_ey brings up, it's important to remember that 5YTs going forward aren't going to be the Sharpe powerhouses they once were...not even close.

Also...not sure if it's been brought up yet but MOM and BaB are historically the largest premia, each around double the size of value (and nearly as robust, IIRC).

lack_ey
Posts: 5548
Joined: Wed Nov 19, 2014 11:55 pm

Re: QSPIX - thoughts on interesting fund

Post by lack_ey » Tue Jun 09, 2015 10:17 pm

countmein wrote:Actually looks like Robert T is in fact using the results from the AQR paper regarding multi-asset style premia. However, for the 40% global small/value (.2/.4 smb/hml): 60% 5 year notes portfolio, I get 8.0/6.8/0.69 Return/SD/Sharpe for the same period, which is a little bit behind the style premia portfolio. And, as lack_ey brings up, it's important to remember that 5YTs going forward aren't going to be the Sharpe powerhouses they once were...not even close.

Also...not sure if it's been brought up yet but MOM and BaB are historically the largest premia, each around double the size of value (and nearly as robust, IIRC).

I mean that the numbers from AQR's paper are using the arbitrarily discounted return numbers and not the simulated-minus-transaction costs one.

The reason the backtest results from portfoliovisualizer are lower is because you're not getting the right factor exposures the way you set it up. Or did you? Does it show what the SMB and HML loadings for those categories were?

countmein
Posts: 404
Joined: Fri Dec 06, 2013 9:10 pm

Re: QSPIX - thoughts on interesting fund

Post by countmein » Tue Jun 09, 2015 11:21 pm

Yes the factor loadings in that backtest should be .2 and .4. The backtest tool's data is mostly based on Vanguard LV, SB, and SV funds which have .2/.4 historical factor loads in a 50/25/25 mix.

But even if small, value, and treasuries did well in the past we know that small, value and beta have been on the decline and that treasuries are bound by their starting yield. I'm not sure the 'grazed-away' status of BaB, Mom and carry, but overall it seems preferable to bet on diversification when you have the opportunity.

User avatar
grap0013
Posts: 1861
Joined: Thu Mar 18, 2010 1:24 pm

Re: QSPIX - thoughts on interesting fund

Post by grap0013 » Wed Jun 10, 2015 7:13 am

matjen wrote:I would say that Robert T. had a balanced review earlier that reached a conclusion that you can get the factor loads desired in a less expensive and complicated manner by just being long (and tilted to factors) if your assets are situated in tax sheltered accounts. If the vast majority of your assets are not tax sheltered and you would have to sell say VTI or VXUS then QSPIX may make sense in order to get you factors per $$. That's my take.


I'm 100% equities all SCV and I still think there is benefit to adding QSPIX. Equity funds are still dominated by beta and QSPIX is a "pure meth" factor fund so it still adds diversification IMO. To be fair, you'd get even more benefit by adding it to a cap weighted dominant portfolio though rather than an already heavily tilted strategy. As stated numerous times, if posters look at how QSPIX performs on a day-to-day basis you can literally see the diversification benefit.
There are no guarantees, only probabilities.

User avatar
grap0013
Posts: 1861
Joined: Thu Mar 18, 2010 1:24 pm

Re: QSPIX - thoughts on interesting fund

Post by grap0013 » Wed Jun 10, 2015 7:15 am

Random Walker wrote: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.

Dave


+1

I'll add that if you add to equity side you likely keep expected returns similar even net of costs (eg 1.50% ER)
There are no guarantees, only probabilities.

longinvest
Posts: 2447
Joined: Sat Aug 11, 2012 8:44 am

Re: QSPIX - thoughts on interesting fund

Post by longinvest » Wed Jun 10, 2015 8:22 am

At $ 883.6 mil in Total Assets under management (according to morningstar), it generates $ 13.25 mil in revenue for AQR. Quite a nice money grab for so little money under management!

That's 30 times more expensive (per dollar under management) than VTSAX (Vanguard Total Stock Market Index Admiral Shares)!!!

If I was to buy a car for 30 times the cost of a Honda Civic ($ 20,000 x 30 = $ 600,000), what could I get?
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VAB/ZRR

User avatar
matjen
Posts: 1670
Joined: Sun Nov 20, 2011 11:30 pm

Re: QSPIX - thoughts on interesting fund

Post by matjen » Wed Jun 10, 2015 9:43 am

grap0013 wrote:
matjen wrote:I would say that Robert T. had a balanced review earlier that reached a conclusion that you can get the factor loads desired in a less expensive and complicated manner by just being long (and tilted to factors) if your assets are situated in tax sheltered accounts. If the vast majority of your assets are not tax sheltered and you would have to sell say VTI or VXUS then QSPIX may make sense in order to get you factors per $$. That's my take.


I'm 100% equities all SCV and I still think there is benefit to adding QSPIX. Equity funds are still dominated by beta and QSPIX is a "pure meth" factor fund so it still adds diversification IMO. To be fair, you'd get even more benefit by adding it to a cap weighted dominant portfolio though rather than an already heavily tilted strategy. As stated numerous times, if posters look at how QSPIX performs on a day-to-day basis you can literally see the diversification benefit.



And QSPIX can be used to kill White Walkers. ;-)
A man is rich in proportion to the number of things he can afford to let alone.

lack_ey
Posts: 5548
Joined: Wed Nov 19, 2014 11:55 pm

Re: QSPIX - thoughts on interesting fund

Post by lack_ey » Wed Jun 10, 2015 6:34 pm

As promised, another "angle of attack" I am surprised the anti-AQR style premia camp has not levied as much: the nature of the four styles. For reference, they are roughly
1. Value — cheap beats expensive
2. Momentum — recently trending up (i.e. last month, last three months, last twelve months; not longer timeframes like last three or five years) beats recently trending down
3. Carry — whatever will do well if current conditions (prices, yields) don't change beats whatever won't do well if current conditions don't change
4. Defensive — less volatile beats more volatile (after adjusting for risk)

Like I said before, I don't profess at all to be that knowledgeable about the four styles. I have not yet done the literature deep dive on these.

But I think that many factor investors may not particularly like some of these factors, never mind the complete factor skeptics. Going back to the Fama-French three-factor model of market, value, and size, basically we have academics telling us that the excess returns of styles comes from greater risk. This is something of a feel-good story. You are being rewarded for taking more risk. Nothing wrong with that. And if somebody else wants negative value (growth), they are just looking for less risk. Yay. Now, not everybody who believes in these factors think that it's all about risk (as in, part of it is behavioral and represents mispricings), but that element is there. And to be honest, even the behavioral stories and rationales for both value and small (and perhaps some others) have some kind of appeal. It's cool to be contrarian and buy up the downtrodden parts of the markets or stick it to the megacorps. You have plenty of value folk heroes to emulate like Warren Buffett.

But the vast majority of people consider momentum to be about mispricings, with the most fashionable explanation being that the market underreacts to news at first (undershooting the true value), with the change towards the true value growing steam and finally even overshooting it eventually as too many people hop on the bandwagon.

You know how some people load up on large caps or growth stocks (remember, the performance is still positive in factor parlance because of the market beta)? Now imagine executing a negative carry trade, where you're guaranteed to keep bleeding money unless *surprise* things happen to turn around. Betting on carry is largely betting that some kind of mispricing continues for whatever reason and you can keep making money from it until it stops working. In currencies traditional economic theory might say that differences in yields between short-term rates are explained by expected currency appreciation or depreciation, so any profit from borrowing at a low rate to invest at a higher rate in another currency is offset by the change in exchange rate; a carry trade is a bet (on lots of empirical information) that that is false.

Finally, defensive is saying that high beta stuff is more often than not overpriced relative to low beta after adjusting return with risk. Again, a kind of mispricing. There are a number of theories why this might be, such as investor leverage aversion (as a result of institutional and regulatory constraints and just preference), lottery-distribution preference, and constraints on short selling. Admittedly, most of these are not about behavioral mistakes.

Regardless, as with any kind of styles, you might expect the effect in the future to be diminished for a number of reasons. And especially for the behavioral ones, many would think that they may go away, supposing that they weren't just statistical flukes. I feel that some of these things may not fit well with the way people think of the markets.

It's not just about detractors. All this may or may not make investors less confident in the fund in the long run if they see multiple years of losses or perhaps a 3-4 standard deviation event on the downside that probably "shoudn't" happen that often. The biggest danger in an unconventional strategy is not having the guts to see it through.


In any case, the most surprising part to me is that virtually nobody mounted an attack against any of the four styles specifically. I would expect more pointed opposition. Instead, people are staying at a high level and are dismissing the fund itself without really explaining why the nuts and bolts don't work or may not work.

longinvest
Posts: 2447
Joined: Sat Aug 11, 2012 8:44 am

Re: QSPIX - thoughts on interesting fund

Post by longinvest » Wed Jun 10, 2015 7:18 pm

lack_ey,

The math is quite simple: http://web.stanford.edu/~wfsharpe/art/active/active.htm

The market (let say all investment-grade nominal bonds + all non-penny stocks) will deliver a return of X% over a period of time T. So, you can go ahead and short some securities and bet long on others, and switch your investments continuously during the period T in an attempt to beat the market. But, all the transactions that you made were not free. If you stick, on top of that, a 1.5% expense ratio, you've got to find lots and lots of dumb active investors to trade with you in order to be able to make a return higher than X% after fees. The hurdle is very high.
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VAB/ZRR

User avatar
nisiprius
Advisory Board
Posts: 33784
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: QSPIX - thoughts on interesting fund

Post by nisiprius » Wed Jun 10, 2015 7:22 pm

Will someone explain the stated fund objective to me? AQR say
Seeks long-term absolute (positive) returns.
What does that mean? Is this an "absolute return" fund? If so, why don't they say what "absolute return" it seeks to achieve? Putnam Absolute Return 500 fund says that it
seeks a positive return of 5% above the return of U.S. T-bills, over a reasonable period of time, generally at least three years, regardless of market condition.
and they say it has in fact
has returned an average of 4.8% annually since inception
Is AQR's goal simply "not to lose money in the long term?"
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

lack_ey
Posts: 5548
Joined: Wed Nov 19, 2014 11:55 pm

Re: QSPIX - thoughts on interesting fund

Post by lack_ey » Wed Jun 10, 2015 8:53 pm

longinvest wrote:lack_ey,

The math is quite simple: http://web.stanford.edu/~wfsharpe/art/active/active.htm

The market (let say all investment-grade nominal bonds + all non-penny stocks) will deliver a return of X% over a period of time T. So, you can go ahead and short some securities and bet long on others, and switch your investments continuously during the period T in an attempt to beat the market. But, all the transactions that you made were not free. If you stick, on top of that, a 1.5% expense ratio, you've got to find lots and lots of dumb active investors to trade with you in order to be able to make a return higher than X% after fees. The hurdle is very high.

This is one of the arguments that detractors have brought up over and over again in the thread, though most have forgotten to talk about the (relatively high) transaction costs. I keep bringing up transaction costs myself.

By the way, this is investing about 30% outside of your market as defined, on a risk allocation level. 15% of the risk is through the currency long/short, and 15% of it is through the commodity long/short strategies. On a dollar-weighted basis, I think it's even higher than that, because the currencies need to be leveraged more to reach those risk targets.

And yes, you need to find dumb investors on the other sides of the trades, at least by some definition of "dumb." This is in the same sense that a long-only value stock fund needs to find dumb investors willing to part with value stocks (supposing that value stocks outperform in the long run), though at a higher frequency because of more trading activity. The strategy here is implemented algorithmically, and while it does incur a relatively high amount of trading activity (prospectus says to expect over 250%), it's not exactly churning nonstop.


nisiprius wrote:Will someone explain the stated fund objective to me? AQR say
Seeks long-term absolute (positive) returns.
What does that mean? Is this an "absolute return" fund? If so, why don't they say what "absolute return" it seeks to achieve? Putnam Absolute Return 500 fund says that it
seeks a positive return of 5% above the return of U.S. T-bills, over a reasonable period of time, generally at least three years, regardless of market condition.
and they say it has in fact
has returned an average of 4.8% annually since inception
Is AQR's goal simply "not to lose money in the long term?"

I think AQR is just being a bit slippery about returns. Most hedged funds should be seeking absolute returns, so this is nothing much different. Some of these funds publish return targets. This one doesn't, and instead it explicitly states it focuses on managing investments to keep expected volatility in the 8-12% range, presumably rather than ratchet up the risk at certain times in an attempt to increase returns to some target.

On a side note, the Putnam fund is not actually hedged and invests long in stocks, demonstrating statistically significant market beta (t-stat of 8.4) and correlation to the markets.

I'm not quite convinced AQR knows what the expected value of the returns should be. The strategy, as outlined in one of the peer-reviewed papers, has a backtested raw return of 17.4% annualized before transaction costs and fees. Obviously this period is good for all four styles and so even they wouldn't expect the same results out-of-sample, the transaction including borrowing costs are not trivial, and they're charging 1.5%, so net expected returns should be a lot lower. I've seen a 7% figure thrown around in several places but haven't yet seen where that comes from.

It's in Larry Swedroe's article here, for example:
http://www.advisorperspectives.com/news ... _Value.php

User avatar
matjen
Posts: 1670
Joined: Sun Nov 20, 2011 11:30 pm

Re: QSPIX - thoughts on interesting fund

Post by matjen » Wed Jun 10, 2015 9:16 pm

lack_ey wrote:I've seen a 7% figure thrown around in several places but haven't yet seen where that comes from.

It's in Larry Swedroe's article here, for example:
http://www.advisorperspectives.com/news ... _Value.php


Let's call BS on 7% and say it is 5% or 6% nominal (9.17% as of 5/29 but has had a bad couple days b/c Grap has been posting about it...the Grap Omen :-) ). Wouldn't that still be kinda awesome given it isn't correlated with stocks or bonds? Wouldn't that be a good thing for one's portfolio? It is the estimated/anticipated low return environment over the next decade that makes this fund more attractive to me. I think Bogle, Asness, Ilmanen and others are estimating something like 2 to 3% real for a 60/40 portfolio. Ilmanen was quoted at 2.5% the others are from memory but I think I am right. This should top it.
Last edited by matjen on Wed Jun 10, 2015 9:37 pm, edited 2 times in total.
A man is rich in proportion to the number of things he can afford to let alone.

User avatar
Maynard F. Speer
Posts: 2139
Joined: Wed Mar 18, 2015 10:31 am

Re: QSPIX - thoughts on interesting fund

Post by Maynard F. Speer » Wed Jun 10, 2015 9:26 pm

longinvest wrote:lack_ey,

The math is quite simple: http://web.stanford.edu/~wfsharpe/art/active/active.htm

The market (let say all investment-grade nominal bonds + all non-penny stocks) will deliver a return of X% over a period of time T. So, you can go ahead and short some securities and bet long on others, and switch your investments continuously during the period T in an attempt to beat the market. But, all the transactions that you made were not free. If you stick, on top of that, a 1.5% expense ratio, you've got to find lots and lots of dumb active investors to trade with you in order to be able to make a return higher than X% after fees. The hurdle is very high.


I'm surprised you think there's any shortage of dumb investors .. The average active or passive fund has an investor shortfall of between 1 and 1.5% per year - that means even the most conservative investors are paying far more in dumb decisions than in fund and platform fees, year after year

You can quite easily see the mindless herding, return chasing and fear looking at the premium/discounts on investment trusts .. People do everything wrong ... And when you get to the average stock picker, they return less than 2% per year

Institutional investors are similarly awful - I've posted that chart showing how they get everything wrong before and after crashes ... The argument that the market is brutally efficient and infinitely intelligent rests on the average performance of mutual funds - but these funds are generally run under conditions (and discussed in a media) that make them every bit as dumb as the investors buying them: e.g. chasing quarterly performance ... My proof is that simply doing everything the market doesn't (being a true contrarian) is about the most consistently high performing strategy there is
"Economics is a method rather than a doctrine, an apparatus of the mind, a technique of thinking, which helps its possessor to draw correct conclusions." - John Maynard Keynes

User avatar
grap0013
Posts: 1861
Joined: Thu Mar 18, 2010 1:24 pm

Re: QSPIX - thoughts on interesting fund

Post by grap0013 » Wed Jun 10, 2015 9:48 pm

matjen wrote:Let's call BS on 7% and say it is 5% or 6% (9.17% as of 5/29 but has had a bad couple days b/c Grap has been posting about it...the Grap Omen :-) ). Wouldn't that still be kinda awesome given it isn't correlated with stocks or bonds? Wouldn't that be a good thing for one's portfolio? It is the estimated/anticipated low return environment over the next decade that makes this fund more attractive to to me. I think Bogle, Asness, Ilmanen and others are estimating something like 2 to 3% real for a 60/40 portfolio. Ilmanen was quoted at 2.5% the others are from memory but I think I am right. This should top it.


I like this matjen character more and more. He/she understands my GOT reference with White Walkers and has given me my own omen. Tis true though, QSPIX is uncorrelated with all assets, but when I speak positively about it on here it has a negative correlation with my remarks of -0.32

FWIW, QSPIX inception thru yesterday has AR of 8.05% with an SD of 8%. Looks like about 7% real returns so far with a SD lower than their target of 10. AQR said what the fund would've done in the past and now it's doing it in real life and people still don't like it. This fund could be around in 20 years performing the same way and some people will still be skeptical.

Full disclosure: I am still in the red from my initial QSPIX purchase this past Jan.
There are no guarantees, only probabilities.

Angst
Posts: 1641
Joined: Sat Jun 09, 2007 11:31 am
Location: St Louis, MO

Re: QSPIX - thoughts on interesting fund

Post by Angst » Wed Jun 10, 2015 9:50 pm

grap0013 wrote:
Random Walker wrote: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.

Dave

+1

I'll add that if you add to equity side you likely keep expected returns similar even net of costs (eg 1.50% ER)

My question, to both grap and Random Walker, is this: At what point do you maximize your portfolio's Sharpe ratio? E.g., grap, instead of 100% SV, are you really something like 90% SV and 10% QSPIX? Or would kicking it up to 20% QSPIX boost your portfolio's Sharpe still further? At what point will you maximize its Sharpe, and is this where you are now?

User avatar
Ketawa
Posts: 1839
Joined: Mon Aug 22, 2011 1:11 am
Location: Norfolk

Re: QSPIX - thoughts on interesting fund

Post by Ketawa » Wed Jun 10, 2015 10:54 pm

nisiprius wrote:Will someone explain the stated fund objective to me? AQR say
Seeks long-term absolute (positive) returns.
What does that mean? Is this an "absolute return" fund? If so, why don't they say what "absolute return" it seeks to achieve? Putnam Absolute Return 500 fund says that it
seeks a positive return of 5% above the return of U.S. T-bills, over a reasonable period of time, generally at least three years, regardless of market condition.
and they say it has in fact
has returned an average of 4.8% annually since inception
Is AQR's goal simply "not to lose money in the long term?"


They explain what that term means in the prospectus:

As further described under “Details About the AQR Style Premia Alternative Fund” in the Fund’s prospectus, a “positive absolute return” seeks to earn a positive total return over a reasonable period of time regardless of market conditions or general market direction.


And later in the prospectus:

The use of the term “positive absolute return” is intended to distinguish the Fund’s investment objective from the relative returns sought by many other mutual funds. Funds seeking relative returns are generally managed with a goal of outperforming an index of securities or an index of competitive funds. As a result, even if these funds are successful in achieving their investment objectives, their investment returns will tend to reflect the general direction of the securities markets. A “positive absolute return” seeks to earn a positive total return over a reasonable period of time regardless of market conditions or general market direction. However, while seeking to generate positive performance over a multi-year period of time, the Fund may have positive or negative returns over shorter time periods.

There can be no assurance that the Fund will be successful in achieving its investment objective.

Random Walker
Posts: 1921
Joined: Fri Feb 23, 2007 8:21 pm

Re: QSPIX - thoughts on interesting fund

Post by Random Walker » Wed Jun 10, 2015 10:56 pm

I have no idea how much QSPIX is needed to maximize the sharpe ratio. I saw the Illmanen CFA presentation last night, and I think I remember some big chunks like 30% in sample portfolio. Moreover, no one knows where a future efficient frontier may be. I do think it is fair to say though that for us Bogleheadish investors, only a fairly small allocation is reasonable because of the high expense. Because of the very low historical correlation to both stocks and bonds and stock market like expected returns, a small allocation can have a surprisingly large diversification effect on the portfolio. It should only go in tax deferred space. For what it's worth, I took from the bond side of a 70/30 portfolio to generate a 3% position in QSPIX. So I'm expecting to increase portfolio volatility, increase expected return, increase sharpe ratio. With a small position like this, even with such a large ER, the overall effect on my portfolio expenses is very small.

Dave

stlutz
Posts: 3919
Joined: Fri Jan 02, 2009 1:08 am

Re: QSPIX - thoughts on interesting fund

Post by stlutz » Wed Jun 10, 2015 11:49 pm

Is AQR's goal simply "not to lose money in the long term?"


Definitionally, yes.

If I randomly buy, say, 100 stocks, I'd expect to earn the market return minus any fees.

If I randomly buy 100 stocks and randomly short 100 others, I'd expect to earn 0 minus costs.

AQR expects to earn some type of profit based on picking the right stocks/commodities/currencies/bonds etc. to buy/short.

User avatar
Robert T
Posts: 2432
Joined: Tue Feb 27, 2007 9:40 pm
Location: 1, 0.2, 0.4, 0.5
Contact:

Re: QSPIX - thoughts on interesting fund

Post by Robert T » Thu Jun 11, 2015 4:11 am

.
It has performed well so far - we have 33 months (almost 3 years) of live returns. See pg 58 of link for returns from Sept. 2012 to Dec 2013. https://www.azasrs.gov/sites/default/fi ... -18-14.pdf - if we add to this the QSPIX returns we get:

Sept 2012 - May 2015 (33 months). Annualized returns (%)

AQR Style Premia = 12.7%
Own portfolio = 12.5%*
Mkt portfolio = 11.1%**

*75:25 Global Stock (with value and small cap tilt):bond
**75:25 Global stock:US total bond (VT:VBMFX)

Robert
.

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

Re: QSPIX - thoughts on interesting fund

Post by robert88 » Thu Jun 11, 2015 6:15 am

Maynard F. Speer wrote:
longinvest wrote:lack_ey,

The math is quite simple: http://web.stanford.edu/~wfsharpe/art/active/active.htm

The market (let say all investment-grade nominal bonds + all non-penny stocks) will deliver a return of X% over a period of time T. So, you can go ahead and short some securities and bet long on others, and switch your investments continuously during the period T in an attempt to beat the market. But, all the transactions that you made were not free. If you stick, on top of that, a 1.5% expense ratio, you've got to find lots and lots of dumb active investors to trade with you in order to be able to make a return higher than X% after fees. The hurdle is very high.


I'm surprised you think there's any shortage of dumb investors .. The average active or passive fund has an investor shortfall of between 1 and 1.5% per year - that means even the most conservative investors are paying far more in dumb decisions than in fund and platform fees, year after year

You can quite easily see the mindless herding, return chasing ...


If you want to define herding and return chasing in a way that's actually measurable, the load on the momentum factor is as good as any. Herding and return chasing is a key part of this fund's strategy. You get less herding and return chasing owning a fund like VTSAX, which should have a load on the momentum factor of almost zero.

longinvest
Posts: 2447
Joined: Sat Aug 11, 2012 8:44 am

Re: QSPIX - thoughts on interesting fund

Post by longinvest » Thu Jun 11, 2015 6:34 am

Random Walker wrote:I do think it is fair to say though that for us Bogleheadish investors, only a fairly small allocation is reasonable because of the high expense.

QSPIX is not an index fund and it comes at an incredibly high cost. As such, it is not a Bogleheadish fund.

Don't take my word for it. Instead, just go read the wiki:Main Page:

The Bogleheads' approach to investing begins with an investor deciding on percentage allocations to various asset classes, such as U.S. stocks, international stocks, U.S. bonds, and cash. The desired allocations are then implemented using low-cost vehicles which are true to the targeted asset classes. Tax costs are carefully considered, influencing decisions as to what investments to place in taxable versus tax-advantaged accounts. Bogleheads emphasize regular saving, broad diversification, and sticking to one's investment plan regardless of market conditions.


If that's not clear enough, let's look at the main site Bogleheads.org. At the top, we can read:
Bogleheads.org – Investing advice inspired by Jack Bogle


I think that it would be a travesty to claim that a recommendation to invest in QSPIX, a highly active fund that costs 30 times the cost of Vanguard's Total Stock Market Index Fund, is inspired by Jack Bogle.

No. It is investing advice inspired by people associated with AQR, many of them being investment advisers who use AQR funds with their clients.
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VAB/ZRR

longinvest
Posts: 2447
Joined: Sat Aug 11, 2012 8:44 am

Re: QSPIX - thoughts on interesting fund

Post by longinvest » Thu Jun 11, 2015 6:45 am

Food for thought:
  • For QSPIX to succeed, it needs dumb investors on the other side of every transaction. Why dumb? Because if QSPIX trades using solid scientific strategies supposed to always win, then these traders should be guaranteed to loose. They must really be dumb to doubt science and continue betting against QSPIX.
  • These dumb investors cannot be total-market index investors who do not trade within the measured period T (see my previous post).
  • Retail investors are now a minority in markets. QSPIX can't just rely on them to make a killing. So, can you identify who the dumb investors are? If not: Look around the Poker table; if you can’t see the sucker, you’re it.
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VAB/ZRR

User avatar
matjen
Posts: 1670
Joined: Sun Nov 20, 2011 11:30 pm

Re: QSPIX - thoughts on interesting fund

Post by matjen » Thu Jun 11, 2015 8:05 am

longinvest wrote:I think that it would be a travesty to claim that a recommendation to invest in QSPIX, a highly active fund that costs 30 times the cost of Vanguard's Total Stock Market Index Fund, is inspired by Jack Bogle.

No. It is investing advice inspired by people associated with AQR, many of them being investment advisers who use AQR funds with their clients.


I think it is a travesty that some people get so wound up about everything Jack Bogle says and/or does. He certainly deserves and has all of our incredible respect but he isn't a god. So for you Boglehead zealots out there please consider this:

1) Jack Bogle is fine with people having 5% of their account set aside to play with as funny money (source: The Little Common Book of Investing) I personally don't own a single stock so at a minimum we can agree to call my cutting edge, Style Premia fund as funny money, if it makes the zealots happy that is, and falls under the Boglehead 10 commandments or whatever. I'll enjoy its performance and Sharpe ratios and lower volatility, etc. I'll enjoy the evolving financial research and literature. The rest of you can count your Tesla or Alibaba stock and enjoy management risk, economic risk, and look at candle charts and take your chances.

2) Recently former SEC Chairman Arthur Levitt interviewed Jack Bogle on Bloomberg and asked him to name others in the industry he respected. He listed four names. One of them was CLIFF ASNESS followed by "knows the business, down to earth, honest, good values, etc." 22 minute mark. I quote Jack " I am a great admirer of Cliff Asness."

https://player.fm/series/a-closer-look- ... ogle-audio

See, we can all be happy now!

EDIT: For those of you that have 5.1% or more of your portfolio in QSPIX...you are complete fools and I feel sorry for you. 8-)
Last edited by matjen on Thu Jun 11, 2015 8:39 am, edited 1 time in total.
A man is rich in proportion to the number of things he can afford to let alone.

User avatar
grap0013
Posts: 1861
Joined: Thu Mar 18, 2010 1:24 pm

Re: QSPIX - thoughts on interesting fund

Post by grap0013 » Thu Jun 11, 2015 8:21 am

Angst wrote:My question, to both grap and Random Walker, is this: At what point do you maximize your portfolio's Sharpe ratio? E.g., grap, instead of 100% SV, are you really something like 90% SV and 10% QSPIX? Or would kicking it up to 20% QSPIX boost your portfolio's Sharpe still further? At what point will you maximize its Sharpe, and is this where you are now?


I'm not too hung up on Sharpe ratios. A great Sharpe ratio won't keep a panicked investor from selling in a down market nor does it predict long term real returns. I am an optimizer/maximizer though.

I was:

50% domestic SCV
25% iSCV
25% EMV/small

Now:

45% domestic SCV
22.5% iSCV
22.5% EMV/small
10% QSPIX

I toyed with a 40:20:20:20 approach initially, but I have to be a little bit skeptical. The round numbers do look prettier. I'm still in a wait and see mode. Honestly, probably will do a little performance chasing. If 5 year real returns of this fund are 4%+ I will increase QSPIX to 20% and that will be my end target. If less than 4% real, I will keep at 10% because there is clearly a diversification benefit but I do not want to sacrifice total portfolio returns too much.

Finally, before making any changes, I'd want to hear back from Larry Swedroe about his quarterly transparency meeting with his financial colleagues at AQR. Is AQR doing what they are saying they are doing with QSPIX? Larry's word is good enough for me.
There are no guarantees, only probabilities.

Random Walker
Posts: 1921
Joined: Fri Feb 23, 2007 8:21 pm

Re: QSPIX - thoughts on interesting fund

Post by Random Walker » Thu Jun 11, 2015 8:41 am

LongInvest,
I take a broader view of Bogleheads:
Passive investing: all index funds are passive, not all passive are index
Diversification: across geographies, sources of risk, sources of return
Buy, hold, rebalance, tax loss harvest
Low costs: but not lowest cost at expense of value
Generate a well thought out plan and stick to it.

QSPIX does meet these criteria. There is no market timing or stock picking: it is blindly sticking to an algorithm as far as I know. It is an expensive fund, but provides a truly unique contribution to an otherwise equity rich portfolio dominated by beta. It's contribution to a well thought out portfolio may make the cost worthwhile.
I believe that one of the dominant Boglehead characteristics is strong belief in market efficiency. But that does not exclude acknowledgement of different types of nondiversifyable risk or some behavioral anomalies that are not arbitraged away.

I think one needs to consider the following in deciding to add an asset class/ investment to a portfolio.
1. Is there historical evidence of favorable behavior
2. Is there out of sample supporting evidence: different time, different market, different asset class
3. Is there a plausible risk or behavioral story backing the data that will provide the investor with the fortitude to stick with the investment at times it's not working.

Cost is extremely important, but portfolio efficiency is as well. Some increase in cost for improved portfolio efficiency may be worth it. Where to draw that line, we can all argue about. And I agree the burden of proof rests on the side advocating higher expense. One can hold a lowest cost S&P 500 fund alone. In 2000 it tanked something in the neighborhood of 50% I think. Need to gain 100% to get back even. Some more expensive diversification across sources of risk and return would have been very worthwhile.

Dave
Last edited by Random Walker on Thu Jun 11, 2015 8:46 am, edited 1 time in total.

User avatar
Ketawa
Posts: 1839
Joined: Mon Aug 22, 2011 1:11 am
Location: Norfolk

Re: QSPIX - thoughts on interesting fund

Post by Ketawa » Thu Jun 11, 2015 8:45 am

QSPIX is 10% of my invested portfolio. I used to be 80/20 equities/fixed income, now I am 75/15/10. I had long been considering an increase to my equity allocation so I took 5% each from equities and fixed income.

QSPIX is actually only 8% of my dollars since I use tax-adjusted asset allocation and it's in my Roth IRA. Including my emergency fund, my breakdown in actual dollars is 67/25/8.

Post Reply