QSPIX - thoughts on interesting fund

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
User avatar
nedsaid
Posts: 7781
Joined: Fri Nov 23, 2012 12:33 pm

Re: QSPIX - thoughts on interesting fund

Postby nedsaid » Fri Jun 12, 2015 8:26 pm

Lack_ey, thanks for your excellent post and reply. I did read the Swedroe article and your post. Yes, the fund may not be as quantitative as I thought. But I see a lot of moving parts in there. Four strategies and six asset classes in each, so there are at least 20 moving parts in there. (Four combinations did not apply). Using leverage in certain cases adds complexity. That is a lot of balls in the air at one time. If you are shorting certain things, that adds more complexity. In reality, you might have 30 or 35 balls in the air and that is a challenge even for the nimblest minds.

I could see where value and defensive go together but it seems to me that momentum would cancel out some of what you where getting with value and defensive (low volatility). It is like having one foot on the gas pedal and the other foot on the brake or maybe just tapping the brake.

As far as the carry trade, I have perceived this as borrowing in a low interest rate currency and then investing the proceeds in a higher interest rate currency and pocketing the difference. While you are doing the carry trade you have to keep an eye on the currencies so that currency movements don't wipe out the spread on interest rates.

My guess is that this fund is tilted on value. Value and defensive going one way and momentum going the other way. Carry to me doesn't have a cancelling out effect. So the momentum would be like tapping on the value brakes. Isn't this what DFA is now doing with their value funds?

If I broke out each of the 20 pieces and studied them, I am sure I could understand each piece. To me this looks like a Rube Goldberg device illustrated in his humorous cartoons. I am not saying it won't work but this seems to be more than what most individual investors could wrap their brain around. As I look at this, I wonder why I would want to own it. Lucy has lots of 'splaining to do.

Would I be adding this to my portfolio so that the wiggles and squiggles would be a bit smoother than they otherwise would have been? In other words, reduce the volatility of the portfolio. Would having this in my portfolio add any return? Or is this just a form of portfolio insurance? That is to make bear markets more tolerable, this would be important for a retiree or near retiree.

As a person maybe 10 years from retirement, I have been toying with the idea of portfolio insurance so that I wouldn't experience a catastrophic drop in my portfolio just before or just after retirement. If I want a less risky portfolio, wouldn't I just add bonds?

If you had a value tilted portfolio, it makes sense to me to maybe add a momentum fund to smooth things out during times when value underperforms. It also makes sense to get momentum to neutral in a value portfolio with stock screens to at least avoid the dreaded value traps as DFA does. But I really wonder about trying to capture too many factors at once.

Again, if Larry Swedroe were my advisor, I would probably buy this as part of the package. He would have to explain to me clearly just what I am getting from this fund and how it fits into the overall portfolio. I figure someone with a lot of research and quantitative tools behind him would have a better shot than me of building a better mousetrap or portfolio. But if I were building my own, I would pass on this fund.
A fool and his money are good for business.

lack_ey
Posts: 5414
Joined: Wed Nov 19, 2014 11:55 pm

Re: QSPIX - thoughts on interesting fund

Postby lack_ey » Fri Jun 12, 2015 9:01 pm

Actually, momentum has been pretty negatively correlated with value (yet with both being distinct and offering positive returns), but defensive is mostly unrelated to both.

A lot of parts, to be sure.

I don't think this should be considered portfolio insurance by anybody. Not with as much leverage and short positions as it has. Even if this stuff isn't all supposed to fail at the same time, maybe it could, or there's a crackdown or scare with the futures and swaps and so on.

That said, if this works anything like as planned, substituting some amount of stocks and bonds with this should increase returns and reduce volatility all at once. e.g. 60/40 stocks/bonds to 54/36/10 stocks/bonds/style premia. If you want less risk and are willing to accept greater likelihoods of lower returns, you just shift to more bonds, sure. But if you wanted to be 30/70 stocks/bonds, there is an argument to move to say 22/68/10 stocks/bonds/style premia. Nothing special about 10%; it could be 5% or whatever else.

The big risk is obviously that it doesn't work anything like as planned, but in some sense that's not much different from any other fund or broad asset class tanking. Except for the fact that if you're in something complicated-looking where you're paying high management fees, everyone will be pointing and laughing if it doesn't work.

Random Walker
Posts: 1756
Joined: Fri Feb 23, 2007 8:21 pm

Re: QSPIX - thoughts on interesting fund

Postby Random Walker » Fri Jun 12, 2015 9:07 pm

Just thought I'd reiterate that the point of this fund is to improve portfolio efficiency. A more efficient portfolio has a compounded return closer to the weighted average annual return of the components. The benefits of a less volatile ride compound over time.

Dave

User avatar
Taylor Larimore
Advisory Board
Posts: 25715
Joined: Tue Feb 27, 2007 8:09 pm
Location: Miami FL

QSPIX - thoughts on interesting fund

Postby Taylor Larimore » Fri Jun 12, 2015 9:25 pm

Bogleheads:

Jack Bogle reminds us about "interesting funds."
The industry's focus has moved from management to marketing. New funds are created with no investment rationale other than the fact investors are clamoring for them.

Reinventing Mutual Funds

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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

Re: QSPIX - thoughts on interesting fund

Postby Angst » Fri Jun 12, 2015 10:02 pm

lack_ey wrote:Nothing special about 10%; it could be 5% or whatever else.

Until someone can give me a better rationale than just a hunch for what percentage of QSPIX one ought to include in their portfolio, I find it hard to justify anything.

lack_ey
Posts: 5414
Joined: Wed Nov 19, 2014 11:55 pm

Re: QSPIX - thoughts on interesting fund

Postby lack_ey » Fri Jun 12, 2015 10:16 pm

Angst wrote:
lack_ey wrote:Nothing special about 10%; it could be 5% or whatever else.

Until someone can give me a better rationale than just a hunch for what percentage of QSPIX one ought to include in their portfolio, I find it hard to justify anything.

What exactly are you looking for? How does one decide between stocks and bonds in a portfolio? It depends on a lot of things, including returns goals, personal risk tolerance, etc.

If you want to do a straight-up MPT analysis, then what do you think the expected returns (over the risk-free rate), volatilities, and correlations will be for all assets considered? Just input that into the optimizer with the right constraints and out pops the answer. If you're looking for highest Sharpe ratio, that can be done (given all those assumptions about unknowable parameters). Keep in mind that you can't even figure out the optimal portfolio for highest Sharpe for just stocks and bonds without knowing expected returns and all the rest.*

I'll just say that if you assume 7% expected return (let's just say the risk-free rate is 0 now, which it is, and base returns off of today's expectations) and 10% standard deviation with 0 correlation with stocks and bonds, you will end up with a very large allocation to the style premia fund under most assumptions of stock and bond performance. In other words, you ain't anywhere close to reaching the efficient frontier with 10% and more will be better, though with diminishing returns.

In practice, you have to balance some kind of theoretical analysis with the possibilities that all your assumptions are wrong in various ways, and do sensitivity analysis, probably account for non-normal distributions, and all the rest. Also, tracking error regret is very real when one is going way against the grain. It is out of these concerns that people are not suggesting 50% allocations here, and so on. And many people will be out of IRA space way before then anyway.


*If you want numbers, let's pretend the following is all true, with all returns given over the risk-free rate of 0:
Stocks — 8% expected return, 16% standard deviation
Bonds — 2.5% expected return, 5% standard deviation
Style premia — 7% expected return, 10% standard deviation
0 correlation between any of these.

Note that all of these are probably optimistic. Let's say you want to target 6% expected return in a year with as little volatility as possible. That means better compounding over the long run. With stocks and bonds, your allocation would be 64% stocks, 36% bonds for a standard deviation of 10.4% and a Sharpe of 0.579. With all three, your allocation would be 23% stocks, 50% style premia, 27% bonds for a standard deviation of 6.35% and a Sharpe of 0.947. If you limit yourself to 10% style premia for whatever reason, it's 56% stocks, 34% style premia, 10% bonds for a standard deviation of 9.17% and a Sharpe of 0.657.

This example is ridiculous for a number of reasons, but there it is.

User avatar
matjen
Posts: 1652
Joined: Sun Nov 20, 2011 11:30 pm

Re: QSPIX - thoughts on interesting fund

Postby matjen » Fri Jun 12, 2015 11:25 pm

Angst wrote:
lack_ey wrote:Nothing special about 10%; it could be 5% or whatever else.

Until someone can give me a better rationale than just a hunch for what percentage of QSPIX one ought to include in their portfolio, I find it hard to justify anything.


5.17% is your answer... :annoyed
A man is rich in proportion to the number of things he can afford to let alone.

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

Re: QSPIX - thoughts on interesting fund

Postby Angst » Fri Jun 12, 2015 11:31 pm

lack_ey wrote:What exactly are you looking for? How does one decide between stocks and bonds in a portfolio? It depends on a lot of things, including returns goals, personal risk tolerance, etc.

If you want to do a straight-up MPT analysis, then what do you think the expected returns (over the risk-free rate), volatilities, and correlations will be for all assets considered? Just input that into the optimizer with the right constraints and out pops the answer. If you're looking for highest Sharpe ratio, that can be done (given all those assumptions about unknowable parameters). Keep in mind that you can't even figure out the optimal portfolio for highest Sharpe for just stocks and bonds without knowing expected returns and all the rest.*

I'll just say that if you assume 7% expected return (let's just say the risk-free rate is 0 now, which it is, and base returns off of today's expectations) and 10% standard deviation with 0 correlation with stocks and bonds, you will end up with a very large allocation to the style premia fund under most assumptions of stock and bond performance. In other words, you ain't anywhere close to reaching the efficient frontier with 10% and more will be better, though with diminishing returns.

In practice, you have to balance some kind of theoretical analysis with the possibilities that all your assumptions are wrong in various ways, and do sensitivity analysis, probably account for non-normal distributions, and all the rest. Also, tracking error regret is very real when one is going way against the grain. It is out of these concerns that people are not suggesting 50% allocations here, and so on. And many people will be out of IRA space way before then anyway.

*If you want numbers, let's pretend the following is all true, with all returns given over the risk-free rate of 0:
Stocks — 8% expected return, 16% standard deviation
Bonds — 2.5% expected return, 5% standard deviation
Style premia — 7% expected return, 10% standard deviation
0 correlation between any of these.

Note that all of these are probably optimistic. Let's say you want to target 6% expected return in a year with as little volatility as possible. That means better compounding over the long run. With stocks and bonds, your allocation would be 64% stocks, 36% bonds for a standard deviation of 10.4% and a Sharpe of 0.579. With all three, your allocation would be 23% stocks, 50% style premia, 27% bonds for a standard deviation of 6.35% and a Sharpe of 0.947. If you limit yourself to 10% style premia for whatever reason, it's 56% stocks, 34% style premia, 10% bonds for a standard deviation of 9.17% and a Sharpe of 0.657.

This example is ridiculous for a number of reasons, but there it is.


lack_ey, thank you so much for your efforts to help me out here.

What I'm looking for is a better handle on this fund, and I'm still struggling. I have a grasp on the notion that if I tilt to small value, I'll have greater risk and a higher SD but also a higher expected return than TSM, albeit one which might not show up for a couple decades. But I have no trouble wrapping my brain around that. I've been tilting to SV for a long time. (I was in Vanguard's Naess Thomas Small Cap fund before it eventually changed its name to "Vanguard Small Cap Index". That's a long time!)

QSPIX covers Value, but it also has Momentum (much more persistent, or what is it..., reliable? than Value), and then there's Carry and there's Defensive. How did they decide on what proportion of each of these 4 factors they'd access? Do they effect the "best" balance of all four factors? Are they arbitrarily effecting equal parts? Are they accessing these factors in such a mix that "best" complements 100% equity? or 60/40 equity/bonds? I wonder what mix QSPIX advocates might ideally prefer?

I've ready many of the AQR papers and "Cliff notes", etc. that have come up in threads over the last year or two but I'm not comfortable with what I've read, and this thread hasn't really helped me. Clearly I'm not ready to invest in this fund although it still intrigues me. I'll keep on reading and hopefully eventually come up with the right questions, but I've yet to be convinced it's worth investing 10% in, let alone maybe 20% or even 50%, which you say is "ridiculous for a number of reasons". My biggest frustration might be that although I'd agree 50% would be ridiculous, simply because I don't fully understand this fund, I'd still be hard-pressed to come up with the remaining number of reasons, given all the praise QSPIX is getting here. Seriously: 7% return, 10% SD? What's not to like? (quoting your stats above)

lack_ey
Posts: 5414
Joined: Wed Nov 19, 2014 11:55 pm

Re: QSPIX - thoughts on interesting fund

Postby lack_ey » Fri Jun 12, 2015 11:58 pm

The "Investing with Style" paper suggests this construction:

In combining the various individual stocks and industry portfolios we weight each market by its relative liquidity and breadth as follows: U.S., 50%; Japan, 16.7%; Europe ex-U.K., 16.7%; and U.K., 16.7%, scaling the resulting portfolio to 10% annual volatility using the ex post sample measures of volatility. Equity country allocation and currency allocation are separately conducted in developed markets (2/3 weight) and emerging markets (1/3 weight), motivated by their relative liquidity. We then combine all of the asset classes into one composite portfolio by assigning a 30% risk weight to individual stocks, 10% to industries, 15% to equity indices, 10% to government bonds, 5% to interest rate futures, 15% to currencies, and 15% to commodities, scaling the resulting portfolio to 10% annual volatility. Overall, 55% of total risk is equity-related (stocks, industries, and country equity indices) and 45% of risk is in other asset classes (fixed income, currencies, and commodities). To be clear, these are allocations of the risk budget to long–short style portfolios, not asset class allocations. As a result of these allocations, the portfolio does not have any passive asset class exposure. These allocations are based on trying to balance building as diversified a portfolio as possible while trading off considerations for liquidity and breadth of assets. Small perturbations in these weights have little effect on our results. Again, our goal is to build as diversified a portfolio as possible both at the style and asset group level. All portfolios are rebalanced monthly.[emphasis added]


It's kind of arbitrary and in the actual fund perhaps they're monkeying around with it a bit. In any case, the allocations are influenced by relative liquidity and aren't just gunning for maximum theoryland results.

The net zero exposure (because long/short, it's all hedged) to asset classes means it potentially complements stocks the same as it does bonds.

Here are some potential reasons not to own the fund or own less than might otherwise be implied, even assuming unlimited IRA space:
1. There may be fundamental problems with the models somewhere
2. A lot of the styles might end up not working as much in the future (and even less than expected; the 7% figure assumes some degradation already) despite many having fairly long histories
3. Perhaps the styles do keep working, but under certain types of crashes not expected, they crash when everything else does
4. Before you notice it, some new regulations or market conditions might make the underlying instruments and trading more expensive, sapping returns
5. The risk of counterparties going under or having problems at least
6. Maybe AQR starts messing around with fund composition and styles to improve things over time but actually make it worse
7. Maybe AQR's risk management blows up on them under some conditions they've never seen before in the backtest or their own trading for anything
8. The fund has some negative skewness (even in the backtest, theoretically quite possibly more in practice) so standard deviation actually understates the left-tail risk if you're expecting a normal distribution
9. If you already own some of the styles like value, there will be slightly less diversification here than for someone who only owns cap-weighted indexes
10. Investor regret if facing a few years of underperformance, never mind a decade (actually, the fund might close before then if that happens); the feelings of sadness, anger, and confusion will be amplified if in an unconventional strategy and less so if say stocks face years of underperformance

Also, there is a whole world of alternative strategies out there. Multialternatives, too. This is just one.

It is very easy to pick a strategy that worked in the past. Good luck to everybody in the future.

User avatar
matjen
Posts: 1652
Joined: Sun Nov 20, 2011 11:30 pm

Re: QSPIX - thoughts on interesting fund

Postby matjen » Sat Jun 13, 2015 12:23 am

Wonderful list and I want to sincerely thank you for all your input on this thread lack_ey #4 is obviously an unknown but is insightful it seems to me.
A man is rich in proportion to the number of things he can afford to let alone.

User avatar
Robert T
Posts: 2426
Joined: Tue Feb 27, 2007 9:40 pm
Location: 1, 0.2, 0.4, 0.5
Contact:

Re: QSPIX - thoughts on interesting fund

Postby Robert T » Sat Jun 13, 2015 4:31 am

countmein wrote:But you cannot replicate VT + QSPIX with RAFI funds because you're only getting one factor with RAFI-- no MOM, defensive, carry, no short side, and no asset diversification.

With RAFI you can get beta, value, and size, and can add a separate momentum allocation (e.g MTUM). You don't get 'carry' and 'defensive', although some argue that multi value metric screens (as used by RAFI) give you some positive quality exposure (particularly with small value), which as Asness says is somewhat linked with 'defensive'. As Fama earlier said, the more factors you add the smaller and smaller the incremental benefits become (if I recall, the word he used was 'tiny'). Another significant difference, not mentioned, is the leverage used by QSPIX. Its true that you can't exactly match the factor loads of a VT + QSPIX combination, but with a 30% allocation to QSPIX, as in the earlier 60/40 example I posted, you can match (at least for the simulated performance over the last 24 years - 1990-2013) the return/SD characteristics fairly closely with long-only funds, with current lower cost, and greater tax efficiency.

Adding QSPIX to 100% value tilted portfolio - can help lower beta risk (e.g. a 10% allocation of zero beta is equivalent to a 90:10 stock:t-bill allocation), without sacrificing much exposure to other factors. Following this, the greater the stock allocation, and the greater the factor tilt of a portfolio, the more value added QSPIX 'could' provide (not guaranteed). i.e. it would be harder to 'replicate' with long-only funds as you have already maxed out the factor tilts available with long-only funds. And again, if no other options are available in 401k but beta funds, then QSPIX could help achieve a tilt to non-beta factors (if that is what you are targeting) in an efficient way as it does not add more beta.

Robert
.

Brogleski
Posts: 37
Joined: Fri Jul 12, 2013 4:23 pm

Re: QSPIX - thoughts on interesting fund

Postby Brogleski » Sat Jun 13, 2015 6:53 am

lack_ey wrote:These "factors" are just regressions based on some certain parameters across the universe of securities. It's just a crude and incomplete decomposition. The momentum factor is defined as the performance of securities that have done relatively well minus the performance of those that have done poorly....
<snip>
In any case, to get purer factor exposure as defined academically, you need to be long/short so as to implement the "minus" part of _____ minus _____. It also usually gets greater exposure per dollar invested.

I see. I imagine in a regression analysis, one result of this would be a more consistent factor exposure, right? Most long only funds have factor exposure that varies pretty significantly between time periods.

lack_ey wrote:Pure beta funds are cheaper and have less turnover, which is good for taxable accounts. You don't run into as much issues with fund providers changing indexes and altering the exposures on you. This sucks if you're stuck with unrealized capital gains in funds you no longer want. I think some small/value tilters may have some horror stories for you. In ETF land, they're a lot more liquid too and trade with tighter spread.

Depending on how much other factor exposure you want relative to market beta, it may or may not be feasible with long-only funds. This was more a problem when multifactor funds were less popular.

Some people may just not want all or a lot of their equities tied to tilting.
Robert T wrote:Adding QSPIX to 100% value tilted portfolio - can help lower beta risk (e.g. a 10% allocation of zero beta is equivalent to a 90:10 stock:t-bill allocation), without sacrificing much exposure to other factors. Following this, the greater the stock allocation, and the greater the factor tilt of a portfolio, the more value added QSPIX 'could' provide (not guaranteed). i.e. it would be harder to 'replicate' with long-only funds as you have already maxed out the factor tilts available with long-only funds. And again, if no other options are available in 401k but beta funds, then QSPIX could help achieve a tilt to non-beta factors (if that is what you are targeting) in an efficient way as it does not add more beta.

These are all valid points. Some of them match my situation, even. Due to upcoming changes in my 401k, I expect to lose DFA access and be left with only beta funds. Moving forward, QSPIX + beta might be a reasonable approach (hence all of my questions).

Thanks for the info, folks.
“A good plan, violently executed now, is better than a perfect plan next week.” - George S. Patton

User avatar
grap0013
Posts: 1857
Joined: Thu Mar 18, 2010 1:24 pm

Re: QSPIX - thoughts on interesting fund

Postby grap0013 » Sat Jun 13, 2015 7:14 am

Angst wrote:
lack_ey wrote:Nothing special about 10%; it could be 5% or whatever else.

Until someone can give me a better rationale than just a hunch for what percentage of QSPIX one ought to include in their portfolio, I find it hard to justify anything.


People can't even agree on REITs nor stock:bond mix. No chance to agree on QSPIX. Although proponents seem to somewhat agree on 5-10% being a good target. There's your number. Rationale, 5-10% improves diversification while reducing volatility and also accounts for some unknowns about this strategy's implementation.
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

Postby Angst » Sat Jun 13, 2015 7:44 am

matjen wrote:Wonderful list and I want to sincerely thank you for all your input on this thread lack_ey #4 is obviously an unknown but is insightful it seems to me.

Big +1 from me too. Thanks lack_ey.

and grap, your current signature serves me well!
"If you can't explain it simply, you don't understand it well enough."

User avatar
packer16
Posts: 808
Joined: Sat Jan 04, 2014 2:28 pm

Re: QSPIX - thoughts on interesting fund

Postby packer16 » Sat Jun 13, 2015 11:12 am

The concept of what the fund is supposed to be is great but how do you get comfortable that this implementation is going to provide you a diversification benefit if the benefit is dependent upon correlations between securities whose underlying characteristic are similar, stocks. Doesn't the benefit depend upon if you can accurately estimate these correlations? This IMO opinion is much more difficult than estimate future risk of these securities. This also appears orders of magnitudes more difficult than stock selection. Also it appears that AQR mis-estimated risk/correlation in 2008 from a poster above in one of their other funds. How do you get comfortable that this will not happen again in the next crash?

Packer
Buy cheap and something good might happen

Random Walker
Posts: 1756
Joined: Fri Feb 23, 2007 8:21 pm

Re: QSPIX - thoughts on interesting fund

Postby Random Walker » Sat Jun 13, 2015 1:34 pm

Packer 16 asked "how do you get comfortable?". I think investing is inherently a bit uncomfortable at least! One of the only ways to gain some comfort is to diversify as broadly as possible. When one is appropriately diversified, there is always a portion of the portfolio that is relatively disappointing. The point of this fund is to further increase the diversification of portfolios dominated by equities and bonds. This fund adds sources of risk and sources of return not typically found in our portfolios.

Dave

User avatar
Robert T
Posts: 2426
Joined: Tue Feb 27, 2007 9:40 pm
Location: 1, 0.2, 0.4, 0.5
Contact:

Re: QSPIX - thoughts on interesting fund

Postby Robert T » Sat Jun 13, 2015 2:23 pm

.
On defensive equity - this recent paper by Novy-Marx on "Understanding Defensive Equity" may be of interest. http://rnm.simon.rochester.edu/research/UDE.pdf

His conclusions:

Over the last 45 years defensive stocks have delivered higher returns than the most aggressive stocks, and defensive strategies, at least those based on volatility, have delivered significant Fama and French three-factor alphas. This performance is not at all anomalous, however, after properly controlling for size, relative valuations, and, most critically, profitability. While investors would have benefited from a defensive tilt over the period, these benefits derive effectively from an unprofitable small growth exclusion, which could have been implemented more efficiently, and at lower cost, directly.

.

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

Re: QSPIX - thoughts on interesting fund

Postby countmein » Sat Jun 13, 2015 2:49 pm

Robert T wrote:With RAFI you can get beta, value, and size, and can add a separate momentum allocation (e.g MTUM).

I think it's too soon to assert this as MTUM hasn't been able to demonstrate that it can avoid negative HmL and alpha in the real world. Time will tell.

You don't get 'carry' and 'defensive', although some argue that multi value metric screens (as used by RAFI) give you some positive quality exposure (particularly with small value), which as Asness says is somewhat linked with 'defensive'. As Fama earlier said, the more factors you add the smaller and smaller the incremental benefits become (if I recall, the word he used was 'tiny').

What does this mean exactly? Is he referring to the fact that the factors tend to negate each other? Isn't it theoretically possible to capture 100% of any number of factors in a long/short fund just by following the construction rules of the factor?

Another significant difference, not mentioned, is the leverage used by QSPIX. Its true that you can't exactly match the factor loads of a VT + QSPIX combination, but with a 30% allocation to QSPIX, as in the earlier 60/40 example I posted, you can match (at least for the simulated performance over the last 24 years - 1990-2013) the return/SD characteristics fairly closely with long-only funds, with current lower cost, and greater tax efficiency.

Was the cost of QSPIX not baked into this backtest?


Adding QSPIX to 100% value tilted portfolio - can help lower beta risk (e.g. a 10% allocation of zero beta is equivalent to a 90:10 stock:t-bill allocation), without sacrificing much exposure to other factors. Following this, the greater the stock allocation, and the greater the factor tilt of a portfolio, the more value added QSPIX 'could' provide (not guaranteed). i.e. it would be harder to 'replicate' with long-only funds as you have already maxed out the factor tilts available with long-only funds. And again, if no other options are available in 401k but beta funds, then QSPIX could help achieve a tilt to non-beta factors (if that is what you are targeting) in an efficient way as it does not add more beta.

Robert
.

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

Re: QSPIX - thoughts on interesting fund

Postby Angst » Sat Jun 13, 2015 2:57 pm

Robert T wrote:.
On defensive equity - this recent paper by Novy-Marx on "Understanding Defensive Equity" may be of interest. http://rnm.simon.rochester.edu/research/UDE.pdf

His conclusions:

Over the last 45 years defensive stocks have delivered higher returns than the most aggressive stocks, and defensive strategies, at least those based on volatility, have delivered significant Fama and French three-factor alphas. This performance is not at all anomalous, however, after properly controlling for size, relative valuations, and, most critically, profitability. While investors would have benefited from a defensive tilt over the period, these benefits derive effectively from an unprofitable small growth exclusion, which could have been implemented more efficiently, and at lower cost, directly.

Thank you RT for the link - No time to read today, but this conclusion sounds like I already (and best) get my defensive exposure through small cap value, i.e. limiting myself to it on the SC end of the spectrum. Correct?

User avatar
Robert T
Posts: 2426
Joined: Tue Feb 27, 2007 9:40 pm
Location: 1, 0.2, 0.4, 0.5
Contact:

Re: QSPIX - thoughts on interesting fund

Postby Robert T » Sat Jun 13, 2015 4:46 pm

countmein wrote:I think it's too soon to assert this as MTUM hasn't been able to demonstrate that it can avoid negative HmL and alpha in the real world. Time will tell.

I think MTUM since inception has done about as well as AQR momentum (AMOMX), and if AQR uses this momentum approach for its style premia fund, then QSPIX has similar issue.

countmein wrote:What does this mean exactly? Is he referring to the fact that the factors tend to negate each other? Isn't it theoretically possible to capture 100% of any number of factors in a long/short fund just by following the construction rules of the factor?

See 38.20 minute mark of interview with Fama http://www.dimensional.com/famafrench/v ... -fama.aspx

countmein wrote:Was the cost of QSPIX not baked into this backtest?

It includes transaction costs, not expense ratio, as I understand.
.

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

Re: QSPIX - thoughts on interesting fund

Postby robert88 » Sat Jun 13, 2015 5:20 pm

Fryxell wrote:Well, I don't believe that premiums are entirely because of risk. I think some are behavioral. I agree with Swedroe that behavioral premiums can persist because of irrationality and limits to arbitrage. And as you noted, some risks are not compensated, such as those in junk bonds. My point is rather that it is curious how nobody seems to doubt the equity premium, even though the evidence for it is exactly the same as for the value and size premiums (historical and risk based); and in the case of momentum the evidence is that it is stronger than the equity premium. And furthermore, stocks underperformed bonds for 40 years from 1969 to 2009, yet no boglehead seems to doubt the existence of the equity premium, including Bogle himself. It is rather curious to me. I think it is because of mental "bucketing" where people mentally categorize stocks and bonds as fundamentally different, thus making it easier for them to rationalize the risk premium for stocks.


While historical financial data can be fun to read about, I doubt most of it has any useful predictive value for investing in the future. Calling historical data evidence is using an unproven assumption that the future will be a repeat of the past. On stocks vs bonds, those bonds were 20-year bonds rolled over annually to maintain a constant maturity, which introduces some interest rate risk. Usually, people on here talk about TBM as bonds. The fact that stocks under-performed bonds over a 40-year time frame indicates that stocks are riskier than bonds, which increases our confidence they should be expected to out-perform bonds in the future, assuming somewhat efficient markets. If there was some guarantee that stocks could never under-perform bonds over 30-years, then they wouldn't really be riskier than 30-year bonds.

User avatar
Robert T
Posts: 2426
Joined: Tue Feb 27, 2007 9:40 pm
Location: 1, 0.2, 0.4, 0.5
Contact:

Re: QSPIX - thoughts on interesting fund

Postby Robert T » Sat Jun 13, 2015 5:27 pm

Angst wrote:Thank you RT for the link - No time to read today, but this conclusion sounds like I already (and best) get my defensive exposure through small cap value, i.e. limiting myself to it on the SC end of the spectrum. Correct?

Not quite - the key ingredient is "profitability".

Extract from Novy Marx paper http://rnm.simon.rochester.edu/research/UDE.pdf

… the performance of defensive equity strategies is explained by known drivers of cross-sectional variation in returns. This is somewhat surprising, as previous work, including Blitz and Van Vliet (2007) and Asness, Frazzini, and Pedersen (2014), explicitly reject the hypothesis that defensive strategy performance is driven by size and value effects. This earlier work fails to account for profitability, however, which is an essential ingredient for understanding defensive strategy performance.

…High profitability is, next to large market capitalization, the single best predictor of low volatility. Defensive strategies consequently tilt strongly towards profitability….

…Small growth stocks also play a critical role in defensive equity. Defensive strategies overweight large value stocks and underweight small growth stocks, which contributes directly to defensive strategy performance….

… Small growth additionally drives defensive strategy performance through a second, indirect channel: within style universes, defensive strategy performance is strongly concentrated in the small growth segment. In fact, defensive stocks only outperform aggressive stocks in the small growth segment; aggressive stocks actually significantly outperform defensive stocks in large value.

… Because of the large variation in valuations and profitability between high and low volatility small growth stocks, the performance of defensive strategies constructed in the small growth universe far exceeds the performance of defensive strategies formed in the broad market. The performance of these small growth defensive strategies nevertheless lags the performance of strategies constructed in the small growth segment that exploit direct variation in valuations and profitability. More generally, accounting for size, relative valuations, and profitability, completely explains the performance of defensive strategies.

…This is not to say that an individual would not have benefited from following a defensive strategy. Investors certainly would have profited from avoiding unprofitable small cap growth firms. Defensive strategies are, however, an inefficient way to exploit these premia, which are better accessed directly. The backdoor route defensive strategies provide to an unprofitable small growth exclusion is also transactionally inefficient, entailing significant rebalancing and high transaction costs (Li, Sullivan, Garcia-Feij´oo, 2014).


… the abstact from Li et al 2014 http://www.cfapubs.org/doi/abs/10.2469/faj.v70.n1.3

The authors found that over 1963–2010, the existence and trading efficacy of the low-volatility stock anomaly were more limited than widely believed. For example, they found no anomalous returns for equal-weighted long–short (low-risk minus high-risk) portfolios and that alpha is largely eliminated when omitting lowpriced stocks from value-weighted long–short portfolios. Furthermore, performance of long–short portfolios was significantly reduced by high transaction costs, reflecting the finding that the abnormal returns were concentrated among low-liquidity and smaller stocks. Amplifying liquidity needs, the anomalous excess returns quickly reversed, requiring frequent rebalancing. The authors’ findings have meaningful implications for implementing low-risk equity portfolio strategies.

.

garlandwhizzer
Posts: 1490
Joined: Fri Aug 06, 2010 3:42 pm

Re: QSPIX - thoughts on interesting fund

Postby garlandwhizzer » Sat Jun 13, 2015 5:53 pm

Robert T wrote:

Over the last 45 years defensive stocks have delivered higher returns than the most aggressive stocks, and defensive strategies, at least those based on volatility, have delivered significant Fama and French three-factor alphas. This performance is not at all anomalous, however, after properly controlling for size, relative valuations, and, most critically, profitability. While investors would have benefited from a defensive tilt over the period, these benefits derive effectively from an unprofitable small growth exclusion, which could have been implemented more efficiently, and at lower cost, directly.


Very interesting, Robert T. Larry has also written about the negative influence of SCG on portfolios which I believe he ascribes at least in part to the "lottery effect." SCG has been called the black hole of investing by some based on its long term track record of underperformance, although you can't prove that by looking at the past performance of Vanguard funds. However, the current PE of Vanguards SCG fund, 45.6, is exactly twice the PE of its SCV fund, 22.8. At present there do seem to be serious valuation concerns in the SCG space relative to SCV and to large caps in general. Very high PE ratios like 45.6 are historically good signs of returns in the recent past but bad signs for future returns.

Garland Whizzer

User avatar
packer16
Posts: 808
Joined: Sat Jan 04, 2014 2:28 pm

Re: QSPIX - thoughts on interesting fund

Postby packer16 » Sat Jun 13, 2015 9:13 pm

Random Walker wrote:Packer 16 asked "how do you get comfortable?". I think investing is inherently a bit uncomfortable at least! One of the only ways to gain some comfort is to diversify as broadly as possible. When one is appropriately diversified, there is always a portion of the portfolio that is relatively disappointing. The point of this fund is to further increase the diversification of portfolios dominated by equities and bonds. This fund adds sources of risk and sources of return not typically found in our portfolios.

Dave


My confusion is how this fund adds value to a simple stock and bond portfolio. From my understanding, stocks and SCV (US and international) stocks provide the highest expected returns of the assets class that are a part of this fund (stocks, bonds, commodity and currency). Bonds provide stability and act a damper to the stock volatility and can be relied upon in a panic, a very good direct diversifier (money does move from stocks to bonds in a panic). So how does this fund add value to a stock (or SCV if you like to tilt) and bond mixture where you can customize the mix?

If these factors are good diversifiers, why are they not used in a long only unlevered format? Do you need the leverage to obtain adequate returns? IMO adding shorting and leverage adds basis (your shorts and/or longs not working as expected) and financial risks that are not found in unlevered asset portfolios. I am having a hard time trying to tell if the increased basis and leverage risks are greater or less than reduction in risk due to factor diversification.

The other interesting point is does exposure to some risks not make sense because the expected return is too low. I think this is the case in commodities, shorting and gold for example. The historical returns for these have been below equities, which makes sense as these are not productive income generating assets, with volatility equal to if not more than equities. So while in a mixture of assets it may provided a higher volatility adjusted return in the past, I don't know how to obtain this return without leverage unless I want the resultant volatility this mixture gives me. Also, obtaining access to these factors is more expensive than access to good old stocks and bonds.

Packer
Buy cheap and something good might happen

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

Re: QSPIX - thoughts on interesting fund

Postby countmein » Sat Jun 13, 2015 10:03 pm

packer16 wrote:My confusion is how this fund adds value to a simple stock and bond portfolio.From my understanding, stocks and SCV (US and international) stocks provide the highest expected returns of the assets class that are a part of this fund (stocks, bonds, commodity and currency). Bonds provide stability and act a damper to the stock volatility and can be relied upon in a panic, a very good direct diversifier (money does move from stocks to bonds in a panic). So how does this fund add value to a stock (or SCV if you like to tilt) and bond mixture where you can customize the mix?

High expected returns+low SD+no correlation to stocks or bonds = improved portfolio Sharpe

If these factors are good diversifiers, why are they not used in a long only unlevered format?

because long-only is necessarily swamped with beta. Can't increase factor load without concomitantly increasing beta.

Do you need the leverage to obtain adequate returns? IMO adding shorting and leverage adds basis (your shorts and/or longs not working as expected) and financial risks that are not found in unlevered asset portfolios. I am having a hard time trying to tell if the increased basis and leverage risks are greater or less than reduction in risk due to factor diversification.

I can't recall the leverage ratio but I don't think it's high enough to create substantial blow up risk. There is also a low-vol version of the fund.

The other interesting point is does exposure to some risks not make sense because the expected return is too low. I think this is the case in commodities, shorting and gold for example. The historical returns for these have been below equities, which makes sense as these are not productive income generating assets, with volatility equal to if not more than equities. So while in a mixture of assets it may provided a higher volatility adjusted return in the past, I don't know how to obtain this return without leverage unless I want the resultant volatility this mixture gives me.

QSPIX is not net exposed to commodities, shorting, or gold. The Sharpe ratio of the fund (backtested and live) is excellent, way better than stocks or bonds [edit: maybe similar to past Sharpe of bonds, but higher than future expected Sharpe of bonds]. Hence all the fuss.

Also, obtaining access to these factors is more expensive than access to good old stocks and bonds.

No way! Why didn't somebody say so? :wink:

Packer

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

Re: QSPIX - thoughts on interesting fund

Postby countmein » Sat Jun 13, 2015 10:41 pm

nedsaid wrote:
Would I be adding this to my portfolio so that the wiggles and squiggles would be a bit smoother than they otherwise would have been? In other words, reduce the volatility of the portfolio. Would having this in my portfolio add any return? Or is this just a form of portfolio insurance? That is to make bear markets more tolerable, this would be important for a retiree or near retiree.


Not insurance. I think it will add uncorrelated return, perhaps a lot of it, and that is the reason to own it. Bonds will no longer provide return, so it's an added source beyond just beta (which happens to be stretched pretty thin).

TradingPlaces
Posts: 1245
Joined: Sun Nov 09, 2014 1:19 pm
Location: 30.286029, -97.530011

Re: QSPIX - thoughts on interesting fund

Postby TradingPlaces » Sat Jun 13, 2015 11:53 pm

AQR, especially Cliff Asness, write very nice and enjoyable academic papers, and I love reading them. However, I would not trust my money with AQR. Every aspect of what is going on with AQR seems to indicate that they:

1. Have weaker and weaker alpha,
2. Try to get bigger and bigger assets.

Simply put, they are asset gatherers. Not any different than PIMCO.

There are 3 types of alpha ideas:

- extremely good. So you only put your own money into it,
- good enough to get other people's money into it,
- not good enough to put any money into it, so you start publishing papers or talking on CNBC.

You don't see the hedge fund managers with real alpha publishing papers. AQR, on the other hand, can not get any more hedge fund assets, so they have transitioned into mutual funds. And 1.5% IS A LOT. Possibly a lot more than a hedge fund that charges 2 and 20.

TradingPlaces
Posts: 1245
Joined: Sun Nov 09, 2014 1:19 pm
Location: 30.286029, -97.530011

Re: QSPIX - thoughts on interesting fund

Postby TradingPlaces » Sun Jun 14, 2015 12:06 am

Remember that from a fund managers point of view, the objective is not to get clients the highest possible return. Their objective is to increase their own income.

The fund manager (can be one person, or multiple people) has their own assets. To the extent that the idea is so good that can provide significant excess returns, then the management will put 100% of their own assets into the idea.

However, if the idea has higher capacity than their own asset can utilize, then the management starts to get outside funds. However, from the management's point of view, the optimal point is to get the MAXIMUM possible fees while capping out the capacity of the idea.

Under that condition, the investor's will simply get market-matching returns or worse.

From the manager's point of view, a beautiful thing occurs when the assets gathered significantly exceed the capacity of the idea. This happens because of two reasons:

1. Reputation,
2. Marketing,
3. Wider distribution.

Imagine that AQR has hedge funds. And they can not longer find any fools who want to put more money into their hedge funds. Next, they are like, why don't we make mutual funds. There are enough uninformed investors (read: fools), who are less sophisticated than hedge fund investors, and we can collect 1.5% from these folks as well. Nevermind that the returns for all our investors are diluted.

In the meantime, let's publish a lot of papers and run an aggressive marketing machine, so that we can fool people into thinking that we really know what we are doing.

So with $131B assets under management, and charging a combination of 2 and 20, or 1.5%, they really collect a lot of money from investors. That's at least $2B a year in fees, assuming that their entire asset based is in the 1.5% fee variety.

From my point of view, in order to justify paying 1.5% fees, I would have to get at least 3% excess returns, after fees. So they have to deliver 4.5% excess returns. 4.5% excess returns on $131B is $5.9 billion. To truly measure that these are excess returns, you have to force them to run long-short. Put it this way: if you have a strategy with 4.5% excess returns over the benchmark, you should be able toe harvest that using a long-short portfolio.

I don't see any ideas in today's investment world that can harvest $6B in a long-short manner.

Jebediah
Posts: 472
Joined: Tue Aug 28, 2012 9:19 pm
Location: Denver, CO

Re: QSPIX - thoughts on interesting fund

Postby Jebediah » Sun Jun 14, 2015 12:38 am

TradingPlaces wrote:Remember that from a fund managers point of view, the objective is not to get clients the highest possible return. Their objective is to increase their own income.

The fund manager (can be one person, or multiple people) has their own assets. To the extent that the idea is so good that can provide significant excess returns, then the management will put 100% of their own assets into the idea.

However, if the idea has higher capacity than their own asset can utilize, then the management starts to get outside funds. However, from the management's point of view, the optimal point is to get the MAXIMUM possible fees while capping out the capacity of the idea.

Under that condition, the investor's will simply get market-matching returns or worse.

From the manager's point of view, a beautiful thing occurs when the assets gathered significantly exceed the capacity of the idea. This happens because of two reasons:

1. Reputation,
2. Marketing,
3. Wider distribution.

Imagine that AQR has hedge funds. And they can not longer find any fools who want to put more money into their hedge funds. Next, they are like, why don't we make mutual funds. There are enough uninformed investors (read: fools), who are less sophisticated than hedge fund investors, and we can collect 1.5% from these folks as well. Nevermind that the returns for all our investors are diluted.

In the meantime, let's publish a lot of papers and run an aggressive marketing machine, so that we can fool people into thinking that we really know what we are doing.

So with $131B assets under management, and charging a combination of 2 and 20, or 1.5%, they really collect a lot of money from investors. That's at least $2B a year in fees, assuming that their entire asset based is in the 1.5% fee variety.

From my point of view, in order to justify paying 1.5% fees, I would have to get at least 3% excess returns, after fees. So they have to deliver 4.5% excess returns. 4.5% excess returns on $131B is $5.9 billion. To truly measure that these are excess returns, you have to force them to run long-short. Put it this way: if you have a strategy with 4.5% excess returns over the benchmark, you should be able toe harvest that using a long-short portfolio.

I don't see any ideas in today's investment world that can harvest $6B in a long-short manner.


Can you substantiate any of this or is it just a bunch of slander? Show us the data that demonstrates "weaker and weaker alpha"? Or that demonstrates that they have no new customers/fools for their hedge funds?

The style premia fund does not attempt alpha anyway...

lack_ey
Posts: 5414
Joined: Wed Nov 19, 2014 11:55 pm

Re: QSPIX - thoughts on interesting fund

Postby lack_ey » Sun Jun 14, 2015 7:03 am

I don't know about AQR in particular, but hedge funds as a whole seem to be trending towards lower and lower alpha. One of the explanations would be the explosion in assets chasing the same sources of return, so there's less of it per dollar to go around. There are a number of different explanations one might suggest, including that the talent pool is diluted by all the influx or losing its touch, reduced investor appetite for leverage, among others.

In any case, the concern being raised is one of capacity. First of all, my understanding with respect to AQR's AUM and fees is that many of the hedge funds are more 1&10 rather than 2&20, and they run a good deal of institutional money not really in hedge fund products too. Then there's the mutual funds. In other words, not some insignificant portion is style-tilted long-only stocks (with ERs close to 0.50%, somewhat higher than say DFA or RAFI smart beta) and risk parity. There's not much in terms of "excess returns" required here.

Now, whether or not you call style premia alpha depends on your perspective. It's all alpha by CAPM. But alpha is just a theoretical construct anyway. There are going to be some securities that outperform others at any given time. The underlying question is just whether they can (more often than not, in aggregate) be identified beforehand. Known premia are just tricks that worked in the past for that, for whatever reason.

User avatar
nisiprius
Advisory Board
Posts: 33618
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

Postby nisiprius » Sun Jun 14, 2015 7:07 am

Random Walker wrote:...Packer 16 asked "how do you get comfortable?". I think investing is inherently a bit uncomfortable at least! One of the only ways to gain some comfort is to diversify as broadly as possible....
Yes, but.

1) You don't just want to diversify for diversification's sake. One should be suspicious of "diversification" claims, because you should always care about return and risk, on every asset you own. The ideal diversifier for stocks is not "anything but stocks." Just "not being a stock" doesn't make something a good diversifier. "For diversification" is a good sales claim for to get people to try anything new, just for the sake of novelty. You could "diversify" into rough rice futures, Bakelite collectibles, Zimbabwe currency (I'll bet somewhere somebody is advertising that it's cheap now and that "experts" say it's undervalued), and they might have low correlation with stocks--but they have high risk and low return.

2) There is a difference in kind between long-only diversification and the use of short positions. Consider gold, for example. I'm a gold skeptic and own 0%, but I accept the premise that for the foreseeable future, if you own gold, you own something of value. If I own a one-ounce gold coin, five years from now I think I can walk into the local coin shop and get hundreds of dollars for it.

This is simple ownership. "I own positive amounts of many different valuable things. No matter what happens I'll always be able to sell some of them."

Manufactured, synthetic diversification through the use of short positions and other sophisticated instruments puts you into totally different territory. Your "diversification" and your comfort level is now completely dependent on your confidence in the manager and your conviction in the strategy. It is no longer based on owning positive amounts of many different valuable things.

As a technical matter of theory, sure, you can imagine things that are crappy investments in themselves that could improve a portfolio--for example, an ideal risk-eraser, an asset with zero return that precisely cancels out stock market fluctuation. In real life, the same maneuvers that manufacture negative correlations with stocks are likely to manufacture negative return, too. In a sense, the perfect diversifier for stock is a short position in the same stock, but I think everyone can see that that's not a good combination.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

User avatar
Robert T
Posts: 2426
Joined: Tue Feb 27, 2007 9:40 pm
Location: 1, 0.2, 0.4, 0.5
Contact:

Re: QSPIX - thoughts on interesting fund

Postby Robert T » Sun Jun 14, 2015 7:45 am

.
Just an additional point on the incremental benefit of adding additional factor sorts.

Studies show large incremental benefits, but not sure how much of this can be realized in after cost returns.

For example Novy-Marx has available data on decile sorts on multiple factors eg. value, profitability, momentum, value/profitability, value/momentum, value/profitability/momentum. It shows relatively large incremental benefits. From 1980-2012 it shows the average annualized returns of top three decile sorts to be 13.2% for value, 15.8% for value/profitability, and 17.6% for value/profitability/momentum. This is not far off what Frazzini et al present in the AQR paper on "A New Core Equity Paradigm: Using Value, Momentum, and Quality to Outperform Markets". Using the same timer period, they show average returns for value = 12.6% and value/profitability/momentum = 17.3% (15.6% net return after trading costs). This is a large difference compounded over time.

In contrast DFA have added a profitability screen to their funds. The simulated returns, as reflected in the DFA Matrix Book from 1975-2012 show the incremental annual return benefit to be: 0.3% for DFA Vector (15.8% vs 15.6%), 0.3% for DFA Core 2 (13.6% vs. 13.3%) and 0.3% or DFA Targeted Value (17.9% vs 17.6%). Over this time period that Novy-Marx data show the incremental benefit of adding a profitability screen to value to be 2.7% per year (17.8% vs. 15.1% using the average annualized returns of the top three deciles of the combined sort). There is a big difference between 2.7% and 0.3% incremental value from adding a profitability sort to a value portfolio. Which data set to believe. I tend to side with DFA on this, as they have closely matched their benchmarks, so perhaps created a more implementable series.

Time will tell whether the incremental benefits will be relatively small (as in DFA simulated series), or large (as in the AQR and Novy-Marx simulated series).

Robert
.

User avatar
nedsaid
Posts: 7781
Joined: Fri Nov 23, 2012 12:33 pm

Re: QSPIX - thoughts on interesting fund

Postby nedsaid » Sun Jun 14, 2015 9:49 am

lack_ey wrote:
The big risk is obviously that it doesn't work anything like as planned, but in some sense that's not much different from any other fund or broad asset class tanking. Except for the fact that if you're in something complicated-looking where you're paying high management fees, everyone will be pointing and laughing if it doesn't work.


Mr. Asness certainly knows a whole lot more about this stuff than I do. I am certain this is a very well-designed fund. My bet is that this fund will work as designed most of the time. My concern is what happens when another market crisis hits. It seems that market crisis always seem to find the chink in the armor, that is that the markets will do the one thing that the designers of this fund did not expect. This is why I am suspicious of long/short and leverage in a portfolio. It seems that the very things designed to reduce risk in a portfolio actually exacerbate it in a crisis.

I am not trashing the fund. I am certain some of the best minds in Wall Street have designed this. The problem is that markets are irrational at the very wrong time and that is during a crisis. The fund in most markets should work and work well. It is just that markets have no obligation to meet our expectations.
A fool and his money are good for business.

stlutz
Posts: 3808
Joined: Fri Jan 02, 2009 1:08 am

Re: QSPIX - thoughts on interesting fund

Postby stlutz » Sun Jun 14, 2015 11:57 am

Having followed the discussion, I actually think the skeptics like me have possibly been somewhat unfair, although there is an underlying reason for that.

The folks here who have talked about using this fund are suggesting to use it as a small part of their portfolio, not as their entire portfolio. That is a different question entirely.

If one starts with total market stock/bond funds, then adding a small QSPIX holding is simply a way to concentrate your holdings in what you consider to be the best stocks/bonds/currencies. You add to your long position in some securities and you reduce your holdings in others by shorting what you are long--i.e. you might be long XYZ Corp. in your total market fund and short it in this fund. While that is a convoluted way to get to a portfolio you want, it gets the job done.

So, I guess I see some merit in the idea. I don't see any merit in picking funds with a 1.5% ER, however. There are simply much cheaper ways to get the same "factor exposures".

I think much of the confusion/debate actually comes back to the misuse of the word "diversification" among some of the factor tilt crowd. To restate, what is going on here is not "diversification," it's "concentration". It's identifying which are the better securities to own and focusing your holdings there. I have no problem with doing this. I do it myself. I'm honest with myself, however, that I'm making a calculated bet that focusing on certain types of securities will be a good thing for my portfolio.

While we don't agree on the virtues/vices of tilting around here, I think we do mostly agree the being 100% QSPIX or holding a portfolio of a dozen stocks that all have similar characteristics are not examples of good portfolios. Labeling such extremely concentrated portfolios as "diversified" is one way that investors fool themselves into believing that they are being smarter than they really are.

Random Walker
Posts: 1756
Joined: Fri Feb 23, 2007 8:21 pm

Re: QSPIX - thoughts on interesting fund

Postby Random Walker » Sun Jun 14, 2015 12:19 pm

Stlutz,
Yes, with regard to equities there are cheaper ways to get the same factor exposure. But!
1. This fund provides access to 4 different styles across multiple asset classes.
2. With regard to equities, this fund provides the factor exposure without increasing exposure to the market factor. All cheaper long only ways to obtain factor exposure give you additional big dose of beta along with the factor. And our long only portfolios already probably have enough of that.

Dave

stlutz
Posts: 3808
Joined: Fri Jan 02, 2009 1:08 am

Re: QSPIX - thoughts on interesting fund

Postby stlutz » Sun Jun 14, 2015 12:40 pm

With regard to equities, this fund provides the factor exposure without increasing exposure to the market factor. All cheaper long only ways to obtain factor exposure give you additional big dose of beta along with the factor. And our long only portfolios already probably have enough of that.


You don't own beta; you own stocks.

If I want a portfolio that is 60% AAPL and 40% XOM, there are an infinite number of combinations of long/short positions I can use to get there. But all of them still leave me with a 60% "exposure" to AAPL and 40% XOM. There is nothing magical about holding simultaneous long and short positions in the same stock than somehow make it better than just being long the net amount.

Random Walker
Posts: 1756
Joined: Fri Feb 23, 2007 8:21 pm

Re: QSPIX - thoughts on interesting fund

Postby Random Walker » Sun Jun 14, 2015 1:52 pm

Stlutz,
Yes there is. The purpose of this fund is to diversify across sources of risk. Beta is one kind of risk. If we go long risk X and short negative risk X, then we pile on exposure to risk X but cancel out the risk that both investments have in common, the market. There is no net exposure to the equity risk factor in QSPIX. There is only net exposure to the other factors.

Dave

User avatar
packer16
Posts: 808
Joined: Sat Jan 04, 2014 2:28 pm

Re: QSPIX - thoughts on interesting fund

Postby packer16 » Sun Jun 14, 2015 1:58 pm

I think part of the problem is stating that there is no correlation to bonds and stocks when that is what you are using bonds and stocks to get exposure to the factors. I can buy that there may be low correlation most of the time but at other times there may be high correlation. The question in my mind does AQR have an approach to dealing with changing correlations over time so they end up with what they expect? Just thinking about how each factor correlation can change and appropriate responses is too hard for me. Then how do you implement this on a stock by stock or bond by bond basis with out too many blow-ups is mind blowing.

Packer
Buy cheap and something good might happen

lack_ey
Posts: 5414
Joined: Wed Nov 19, 2014 11:55 pm

Re: QSPIX - thoughts on interesting fund

Postby lack_ey » Sun Jun 14, 2015 2:25 pm

Correlations are always going to change on a short-term basis or measurement, if by no reason other than randomness. I think on a long-term basis you can be fairly confident of a hedged long/short approach having low correlation with the underlying assets. Correlations here do not need to be managed; the property results from hedging out and getting zero net beta for stocks and so on for the other categories.


From a portfolio rebalancing and TLH perspective there is a subtle difference in how assets are held to get the total net exposure, at least on some practical level (not continuous rebalancing). It's not magic but it's potentially not nothing.

The bigger practical consideration is a scenario of limited IRA space where some kind of concentrated factor fund is the only real way to build the portfolio if that's what you want.

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

Re: QSPIX - thoughts on interesting fund

Postby Yesterdaysnews » Sun Jun 14, 2015 3:58 pm

I decided to buy this fund in my Fido IRA. I have purchased a sizable amount (400k) and am curious to see how it performs relatively to equties I hold in my taxable account at Fido. Will report back !

User avatar
nedsaid
Posts: 7781
Joined: Fri Nov 23, 2012 12:33 pm

Re: QSPIX - thoughts on interesting fund

Postby nedsaid » Sun Jun 14, 2015 7:54 pm

Yesterdaysnews wrote:I decided to buy this fund in my Fido IRA. I have purchased a sizable amount (400k) and am curious to see how it performs relatively to equties I hold in my taxable account at Fido. Will report back !


Wow. That is one very expensive lab experiment. Hope it works well for you. Please report back, I for one will be very interested.
A fool and his money are good for business.

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

Re: QSPIX - thoughts on interesting fund

Postby Yesterdaysnews » Sun Jun 14, 2015 10:05 pm

nedsaid wrote:
Yesterdaysnews wrote:I decided to buy this fund in my Fido IRA. I have purchased a sizable amount (400k) and am curious to see how it performs relatively to equties I hold in my taxable account at Fido. Will report back !


Wow. That is one very expensive lab experiment. Hope it works well for you. Please report back, I for one will be very interested.


I am curious about how it performs. I don't think a small position in a fund like this really adds anything significant. Plus, in an IRA, switching out is not that big a deal if it proves to be a dud.

rrppve
Posts: 751
Joined: Sun Aug 12, 2012 12:35 am

Re: QSPIX - thoughts on interesting fund

Postby rrppve » Sun Jun 14, 2015 10:20 pm

nedsaid wrote:
Yesterdaysnews wrote:I decided to buy this fund in my Fido IRA. I have purchased a sizable amount (400k) and am curious to see how it performs relatively to equties I hold in my taxable account at Fido. Will report back !


Wow. That is one very expensive lab experiment. Hope it works well for you. Please report back, I for one will be very interested.

Gotta run the experiment with real dollars if you want to get the benefit before all known anomalies "are grazed away." I put money into it earlier this year. It does zig when others zag. Very hard to predict what it will do on a daily basis despite knowing what the markets have done. Thus, I do believe it is an uncorrelated diversifier. I also think that it is totally unknown how it will behave in the next crisis. I do think the diversity of asset classes makes it less likely to blow up, but who really knows. I thought LTCM looked good back in the late 90s, but didn't have any money in it, and we all know how that turned out. Only time will tell.

User avatar
grap0013
Posts: 1857
Joined: Thu Mar 18, 2010 1:24 pm

Re: QSPIX - thoughts on interesting fund

Postby grap0013 » Mon Jun 15, 2015 7:05 am

nedsaid wrote:
Yesterdaysnews wrote:I decided to buy this fund in my Fido IRA. I have purchased a sizable amount (400k) and am curious to see how it performs relatively to equties I hold in my taxable account at Fido. Will report back !


Wow. That is one very expensive lab experiment. Hope it works well for you. Please report back, I for one will be very interested.


Ha ha, it's all relative. This poster may have a 50 million dollar portfolio and 400K is peanuts compared to the total balance. Or maybe he has a chronic illness with a shorter life expectancy and his portfolio does not have to last that long.
There are no guarantees, only probabilities.

User avatar
grap0013
Posts: 1857
Joined: Thu Mar 18, 2010 1:24 pm

Re: QSPIX - thoughts on interesting fund

Postby grap0013 » Mon Jun 15, 2015 7:10 am

Random Walker wrote:Packer 16 asked "how do you get comfortable?". I think investing is inherently a bit uncomfortable at least! One of the only ways to gain some comfort is to diversify as broadly as possible. When one is appropriately diversified, there is always a portion of the portfolio that is relatively disappointing. The point of this fund is to further increase the diversification of portfolios dominated by equities and bonds. This fund adds sources of risk and sources of return not typically found in our portfolios.

Dave


+1

I can 100% confidently say QSPIX adds diversity. I'll repeat, any investor can run some correlation coefficients and see that it is not correlated to traditional stocks and bonds. This is a fact. Add it to a watch list and see what it does if you do not believe me. Whether its diversification benefit is worth it is up to the individual investor.
There are no guarantees, only probabilities.

User avatar
matjen
Posts: 1652
Joined: Sun Nov 20, 2011 11:30 pm

Re: QSPIX - thoughts on interesting fund

Postby matjen » Mon Jun 15, 2015 7:41 am

I have owned a chunk of QSPIX since May of 2014. Figured I would get in early and have been quite pleased. Even if it just does OK, it is entertaining at a minimum. Happily, it has been doing much better than OK. Fingers crossed moving forward. :mrgreen:
A man is rich in proportion to the number of things he can afford to let alone.

RNJ
Posts: 736
Joined: Mon Apr 08, 2013 9:06 am

Re: QSPIX - thoughts on interesting fund

Postby RNJ » Mon Jun 15, 2015 10:11 am

I've been following this discussion with great interest. Lots to digest conceptually. I appreciate the thoughtful back and forth. Unfortunately, I have little to contribute in that regard. However, I will offer two very quick thoughts. First, I cannot help but feel that there is something of a "shiny new toy" aspect to the discussion. Second, a quick calculation shows that taking a 5% position in this fund would raise my overall investment expense by nearly 45%.

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

Re: QSPIX - thoughts on interesting fund

Postby Yesterdaysnews » Mon Jun 15, 2015 3:32 pm

I have always been open to alternative investment types over the years. I believe these things can add a lot of diversity to just a straight forward stock and bond portfolio. Keeps it interesting. Plain vanilla index funds can be pretty risky also.

Johno
Posts: 1883
Joined: Sat May 24, 2014 4:14 pm

Re: QSPIX - thoughts on interesting fund

Postby Johno » Tue Jun 16, 2015 12:01 am

nedsaid wrote:
Yesterdaysnews wrote:I decided to buy this fund in my Fido IRA. I have purchased a sizable amount (400k) and am curious to see how it performs relatively to equties I hold in my taxable account at Fido. Will report back !


Wow. That is one very expensive lab experiment. Hope it works well for you. Please report back, I for one will be very interested.

As mentioned by somebody else, we've no idea what % $400k is, though personally I would still consider that a 'sizable amount' even if it were a small %, I don't look at money completely relatively, YMMV.

Anyway, I don't actually see any point in just 'watching' a fund like this. I doubt many people who are reflexively against a fund like this are going to be convinced by say 5yrs of good performance ('it's a fluke' they'll say, and actually it could be), and the longer than that you go the more the world might be changing to make the fund obsolete. Though if one simply says 'no interest', that's fine, of course.

But as I stated on previous threads, I think the scare mongering about this fund being a time bomb is basically silly. Anything can happen but that's true of the stock market also. Same goes for comparisons of (different) AQR products that went down *slightly* more than the stock market in 2009. Yes that was a well publicized black eye for AQR but it's a rather selective reading of their record, and again Absolute Return Fund's historic performance doesn't look at all like QSPIX's backtested performance. The argument that 'well there could be some other totally different scenario where QSPIX does correlate (down) with the stock market' is basically admitting that the Absolute Return Fund example is irrelevant.

The basic gamble with a reasonable size slice of QSPIX is that it just doesn't do much at all in terms of return in the future, which would make it mainly a dud IMO even with low correlation to stocks and bonds. I haven't seen any good argument made on any of these threads why it would be as likely as a stock index fund to blow up and lose a lot, and we know the latter is not that unlikely, and there's no gtee of a come back from a stock market meltdown in a reasonable portion of an investing life time; the idea that there somehow is is the most common dangerous delusion on this generally level headed forum IMO. Something with a reasonable chance of reasonable return (US stock expected returns are IMO only mid single digits nominal now so 'reasonable' isn't much) and low correlation to stocks is worth considering. Asking for a gtee is not realistic.

lack_ey
Posts: 5414
Joined: Wed Nov 19, 2014 11:55 pm

Re: QSPIX - thoughts on interesting fund

Postby lack_ey » Tue Jun 16, 2015 12:16 am

On the other hand, even if there is no quick snapback in stock returns, there probably still is some tendency of mean reversion or at least prices eventually having some kind of relationship with underlying fundamentals. For bonds if you have a drop (other than defaults and so on), obviously that means higher yields so you can expect a recovery at least in nominal terms.

For styles/factors, is there a reason to expect a recovery after a loss? I think in value stocks some people talk about some kind of mean reversion and cycles of value doing better and then worse but I haven't seen good data on it and people do have a tendency to see spurious patterns in this kind of data.


Return to “Investing - Theory, News & General”

Who is online

Users browsing this forum: abuss368, anonsdca, azanon, Case59, Dave55, dreamrrr, goblue100, jimishooch, KSOC, MrDogg, Portfolio7, psteinx, sean.mcgrath, TheHouse7 and 93 guests