QSPIX - thoughts on interesting fund

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nedsaid
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Re: QSPIX - thoughts on interesting fund

Postby nedsaid » Tue Jun 16, 2015 7:27 am

Johno wrote:
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.


I am open minded towards this fund and yet dubious about purchasing it. I do have concerns about the fund and I don't think they are silly. First, there is a level of complexity to the fund and I counted at least 20 moving parts. Second, I know that leverage and short selling are used in the fund. These can be very useful tools but another question is how much of this are they doing? Is the amount of leverage and short selling going to change with the market conditions? As with all funds, we would get quarterly reports but with window dressing near quarter end it is hard to see exactly what the managers are doing. If the managers are too transparent, they could give away the "secret sauce." There is a big element of faith in the managers.

Part of this is that this fund invests in commodities and currencies, two areas of investment with which I have not participated in myself. I also have not leveraged my investments or ever participated in short selling. I have never done anything with options. So I am pleading lack of experience and perhaps ignorance on my part. I am also trying to understand how you make something entirely market neutral and distill out everything but whatever factor you are trying to invest in.

The fund sponsors obviously have put a whole lot of thought into this fund. It probably is very well constructed. They have tried to minimize the risk of the fund "blowing up" by investing in more liquid investments. I suppose if liquidity in one of the big markets dried up, it could create a big problem. For example, liquidity in the bond market dried up in late 2008 except for treasuries and certain government agency bonds like GNMAs. It is such unforeseen events that put a big kink in the design of the fund. It is hard to guard against that one unforeseen event that always seems to happen in times of market stress.

In some ways, the fund is only as good as the shareholders themselves. Shareholder redemptions at the wrong time can frustrate the best of fund managers. I would be interested to know if the fund has place restrictions on trading and redemptions by the shareholders.

The other problem is that markets are smart. If someone finds an edge out there, it isn't too long before the copycats come in. I am just asking questions.
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Re: QSPIX - thoughts on interesting fund

Postby lack_ey » Tue Jun 16, 2015 3:25 pm

nedsaid wrote:Second, I know that leverage and short selling are used in the fund. These can be very useful tools but another question is how much of this are they doing? Is the amount of leverage and short selling going to change with the market conditions? As with all funds, we would get quarterly reports but with window dressing near quarter end it is hard to see exactly what the managers are doing. If the managers are too transparent, they could give away the "secret sauce." There is a big element of faith in the managers.

Excessive portfolio churn is a drag on returns, so my suspicion would be relatively little gaming around of assets before the reports. Exact sequence of trade execution and assets is part of the secret sauce, but I don't really see how you can glean much of that by reading these reports, especially because any given security can be picked long or short by any of the underlying strategies and it's not like the report tells you exactly when it was picked up and why. Good luck figuring exactly what they're doing and how at a low level by reading those.

The short selling should equal the long side in some sense. Not quite by dollars but by risk amounts and exposures. For example, they're implementing defensive in stocks by going long securities with lower market beta and short securities with higher market beta, canceling out the beta exposure. If one stock on the long side has a beta of 0.6 and another on the short side a beta of 1.2, to hedge you beta exposure you'd be twice as much long the first one as short the second, with the idea that in the long run 2x the performance of the 0.6 beta stock does better than 1x the performance of the 1.2 beta stock.

The size of both long and short positions (i.e. the amount of leverage) does change with market conditions, being tied to the volatility forecasts (which are just based on recent history). When the volatility of underlying securities is higher, less leverage is used; when volatility is down, more leverage is used. Note that many oddities and problems in the markets occur after volatility has spiked, so in these cases the fund would be less leveraged already. Also note that if an asset class is tanking or spiking up, the short positions should offset the long positions, so in theory the direction of the markets doesn't much matter. Volatility targeting just helps mitigate partial blowups and theoretically keeps behavior more consistent. Perhaps more consistent than the assets themselves, as long-only positions in assets change behavior over time, swinging more wildly at some times and less at others.

nedsaid wrote:I am also trying to understand how you make something entirely market neutral and distill out everything but whatever factor you are trying to invest in.

You can't hedge out everything, and that's the point, but the concept of being market neutral in a well-defined sense should be relatively simple.

Imagine a very simplified model of stocks where we assume that everything has a market beta of 1. Then calculate the return of the market (market-cap weighted average return across all stocks). We can decompose the return of each individual stock into [return of the market] + [unique return]. Let's say the market is up 20%. Stock A returned 25% and stock B returned 10%. We say the unique return of A is 5% and for B it is -10%. If we want to be market neutral, we can go long one stock and short the other, say long A and short B. The [return of the market] portion is the same for both, so it is canceled out and all you're capturing is the unique component of each of A and B (positive A, negative B). If we're long A and short B, we don't care about the direction of the market, what [return of the market] is. Let's say the market is down 10%, A is down 12%, and B is down 15%. In this case, we made money because A did better than B. A long-only fund would move with the markets because every stock it owns contains that [return of the market] component, and it would be pretty hard for it to actually come out positive in such conditions unless the stock picks were amazing. The flip side is that if the market is up 50% and you're long all the stocks that returned more like 30% or 40%, you're probably in big trouble. And though this decomposition is arbitrary in some sense, just mathematical, it has theoretical and empirical underpinnings because the performance of stocks as a whole are related in some real way.

You can always introduce other factors, including market beta, quantifying the extent of which a stock moves with the market, to extend the above. All this holds for the other asset classes too.

The problem is just that we better be right that A will do better than B. Some might say that B may just as well do better than A, so you're counting on manager skill to determine which to pick. That's right, but the "skill" here is just embedded in algorithmic rules that at a high level should be very simple and are time tested (for the full extent of what that does and doesn't mean). The bet here is that A will do better over the long run and more often than not, because the stocks chosen long will have high value, high momentum, and low beta, and the stocks chosen short will have low value, low momentum, and high beta, and these in the aggregate tilt the odds in our favor. This is the edge, for better or worse. Same for the other asset classes and for carry where applicable. And hopefully this edge is enough in our favor to cover all the heavy transaction costs and the very high manager fee, plus more. (That is, where "our" doesn't even include me, and it doesn't include you either, because we both don't own this fund. :P)

Now, there are a lot of other things that influence returns other than the factors being loaded on and the one being hedged out. The hope is that these don't have much net effect (that any effect is diversified out) and the parts that we do want are captured and provide positive returns.

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nedsaid
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Re: QSPIX - thoughts on interesting fund

Postby nedsaid » Tue Jun 16, 2015 3:42 pm

Lack_ey, thank you for your detailed response. That gives me a better idea how all this works. I have read it and I will go back and re-read it a few times. It was a good explanation of how the short selling part of this works. I appreciate it.
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Re: QSPIX - thoughts on interesting fund

Postby countmein » Tue Jun 16, 2015 3:57 pm

3 - 4x leverage according to Swedroe.

Without some kind of performance attribution data, it's tough to do more than tiptoe into this fund. Anyone connected enough to get ahold of some kind of attribution report? Would it be illegal to post here?

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Re: QSPIX - thoughts on interesting fund

Postby lack_ey » Tue Jun 16, 2015 4:04 pm

That much leverage on each of the long and short sides, if I recall correctly.

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Re: QSPIX - thoughts on interesting fund

Postby rrppve » Tue Jun 16, 2015 4:28 pm

countmein wrote:3 - 4x leverage according to Swedroe.

Without some kind of performance attribution data, it's tough to do more than tiptoe into this fund. Anyone connected enough to get ahold of some kind of attribution report? Would it be illegal to post here?

Slides 10 & 12 of the presentation have the performance attribution data
https://drive.google.com/file/d/0B5e27jJiI-z2SXZHTERJQ3BRd2M/view?usp=sharing
If someone can show me how to just post the table in readable format or a screenshot, that would be helpful.
Looking at the two tables, the defensive factor in stocks & industries provided the largest contribution to returns in 2004 and 2nd largest in Q4. It is interesting to see the movement in which factors contribute positive returns. The variation among the factors is one argument that it is a good idea to diversify your factor bets across asset classes and amongst different factors.

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Re: A second look at QSPIX

Postby Oliver » Tue Jun 16, 2015 7:41 pm

Taylor Larimore wrote:I decided to take another look by going to Morningstar, the most reliable source of objective information about mutual funds. This is a small portion of what I found on their website for "AQR Style Premia Alternative I QSPIX.

* QSPIX has an estimated 10-year cost of $2,944. For comparison, Vanguard Total Stock Market Admiral (VTSAX) has an estimated 10-year cost of $64

Morningstar is a great source of information. However, the 10-year cost does not reflect the 1.5% expense cap. The one year expense for a $10,000 investment would be around $150. The 10-year cost would be closer to $1,500 than Morningstar's estimate of $2,944. (Obviously, QSPIX is more expensive than a cap weighted index fund.)

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Re: QSPIX - thoughts on interesting fund

Postby Oliver » Tue Jun 16, 2015 8:13 pm

I will be investing between 5% to 10% of my portfolio in QSPIX.

Of all the downsides mentioned in this thread, I find that I do not have a good handle on third party risk. The risk of a third party being unable to fulfill its obligations is most likely to occur during (or cause) a financial crisis when almost everything is dropping in value.

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Re: QSPIX - thoughts on interesting fund

Postby Johno » Tue Jun 16, 2015 9:07 pm

nedsaid wrote:
Johno wrote:
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

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.

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.


1. First, there is a level of complexity to the fund and I counted at least 20 moving parts.

2. There is a big element of faith in the managers.

3. I am also trying to understand how you make something entirely market neutral and distill out everything but whatever factor you are trying to invest in.

4. They have tried to minimize the risk of the fund "blowing up" by investing in more liquid investments. I suppose if liquidity in one of the big markets dried up, it could create a big problem. For example, liquidity in the bond market dried up in late 2008 except for treasuries and certain government agency bonds like GNMAs.

5. The other problem is that markets are smart. If someone finds an edge out there, it isn't too long before the copycats come in. I am just asking questions.

1. As someone else said on this or earlier thread, it's more like multiplicity than conceptual complication. They are using simple instruments (no options AFAIK, just futures, cash stocks and other simple cash underlyings). It's true there are pretty many (factors, markets) but that also cuts against the argument it's a time bomb, since a lot of different things have to go wrong for it blow up.

2. I agree in the proper context of confidence they do what they say are going to (rather than consciously or by mistake do something else), which is inherently pretty low volatility relatively because as in 1. it's pursuing different 'style premia' in different markets. It's not faith as in 'here's a magic way to make very high returns with low risk which might boil down to a very few very big positions or actually complicated trades or instruments*, but trust us'. Again, I see the biggest relative risk by far being that these strategies just spin their wheels in the future, compared to their success in the past. There is IMO no way to settle that argument except to see what happens, and even seeing what happens for some years doesn't predict the same thing will happen for more years.

3. I wouldn't expect it to be entirely 'market neutral', but the directional exposure is going to tend to be relatively not so large and spread around to different markets and directions.

4. As in general, compared to what? A complete liquidity panic is not good for stocks either, or any instrument but govt bonds, that is in crises of recent times. We can't be certain there won't eventually be a crisis *centered* on loss of confidence in highly indebted rich country govt issuers perhaps even including the US. But futures markets which this fund uses for positions in govt bonds, short term rates, currencies etc are typically the last to lose liquidity.

5. The so called style premia have long persisted. One explanation why that might be so is that they do involve taking risk, just different risk not closely correlated with the equity risk premium. For example, in an earlier thread on this fund, somebody posted an interesting article from another investment outfit about why they thought the currency carry trade has worked (which it definitely has, that's no arcane data mining finding) but might not as much now or in the future (less risk of relative inflation changes as major currency monetary policies tend to be more in sync). The rational investor should be looking to take different uncorrelated risks if possible, rather than concentrate all risk taking in the equity risk premium. However it's still fair to debate whether risks uncorrelated to the equity risk premium exist and are sufficiently remunerated (eg. after subtracting fees and costs). And their existence and extent is inherently uncertain looking forward. But QSPIX doesn't depend on believing the fund manager creates return out of thin air.

*where the common LTCM mis-comparison comes in; among the (several) sources of huge losses there was taking big short positions in equity option implied volatility: that's completely different.

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Re: QSPIX - thoughts on interesting fund

Postby nisiprius » Tue Jun 16, 2015 9:14 pm

Was this the fund of which Larry Swedroe said you should divide the expense ratio by two because you were getting factor exposures on both the long and the short side?
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Re: QSPIX - thoughts on interesting fund

Postby SnowSkier » Tue Jun 16, 2015 10:03 pm

nisiprius wrote:Was this the fund of which Larry Swedroe said you should divide the expense ratio by two because you were getting factor exposures on both the long and the short side?


Yes.

And, the one that Larry said he was putting about 3% of his own money into.

And, the one that Larry said the investment committee of his firm had decided to start using.

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Re: QSPIX - thoughts on interesting fund

Postby backpacker » Tue Jun 16, 2015 10:33 pm

Johno wrote: As someone else said on this or earlier thread, it's more like multiplicity than conceptual complication. They are using simple instruments (no options AFAIK, just futures, cash stocks and other simple cash underlyings). It's true there are pretty many (factors, markets) but that also cuts against the argument it's a time bomb, since a lot of different things have to go wrong for it blow up.


I understand that this fund is targeting several factors. But how is it targeting those factors? Is it running separate portfolios and rebalancing? Using multiple screens? No one knows.

For example, how would I go about estimating the value loading of QSPIX?
Last edited by backpacker on Tue Jun 16, 2015 11:02 pm, edited 1 time in total.

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Re: QSPIX - thoughts on interesting fund

Postby lack_ey » Tue Jun 16, 2015 11:01 pm

backpacker wrote:
Johno wrote: As someone else said on this or earlier thread, it's more like multiplicity than conceptual complication. They are using simple instruments (no options AFAIK, just futures, cash stocks and other simple cash underlyings). It's true there are pretty many (factors, markets) but that also cuts against the argument it's a time bomb, since a lot of different things have to go wrong for it blow up.


I understand that this fund is targeting several factors. But how is it targeting those factors? Is it running separate portfolios and rebalancing? Using multiple screens? No one knows.

To take a simple question: How would I go about estimating the value loading of QSPIX?

They don't describe the underlying low-level allocation details and the proprietary trading algorithms. I also see this as a relatively minor issue compared to all the other ones. Their longer-term history with the hedge funds and the relative performance of some of the longer-running mutual funds like the managed futures fund (relative to those in its category) don't seem to raise red flags in terms of the ability to execute. They state long-term strategic style exposures (34% to value), and their papers on style premia suggest a certain risk weighting for the different style/asset class combinations. In the short term these are presumably allowed to drift some so as to avoid excessive portfolio churn.

I think they have papers on quantifying and assessing value measures in equities that you can look for. The "Investing with Style" and some of the more general descriptions describe value as just price/book, but in general they (and most others) say that value is better defined by combining different measures, so you'd think they'd be using multiple measures.

In the end, they are long enough high value securities and short enough low value securities (same with all the other styles) to get the exposures at the levels in line with overall projected portfolio volatility being as intended. Does it really matter how this is done, if it's done reasonably well?

But if you want to estimate the value loading, you need to define what "value" means to you. Most times people are using it in the context of a certain group of equities, with some kind of sort within a category such as US stocks. That describes only a moderate slice of what they are calling value here, but if you want, you can calculate the value loading by running the regression based on value (by your definition) and the series of returns here.

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Re: QSPIX - thoughts on interesting fund

Postby HomerJ » Tue Jun 16, 2015 11:15 pm

lack_ey wrote:Does it really matter how this is done, if it's done reasonably well?


Heh, the crux of the matter.

"If it's done reasonably well". Pretty big if there.

There's all kind of things I could invest in, and not care how the investments are handled, as long as I assume the people handling the money are doing it "reasonably well".

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Re: QSPIX - thoughts on interesting fund

Postby Jebediah » Tue Jun 16, 2015 11:21 pm

backpacker wrote:
Johno wrote: As someone else said on this or earlier thread, it's more like multiplicity than conceptual complication. They are using simple instruments (no options AFAIK, just futures, cash stocks and other simple cash underlyings). It's true there are pretty many (factors, markets) but that also cuts against the argument it's a time bomb, since a lot of different things have to go wrong for it blow up.


I understand that this fund is targeting several factors. But how is it targeting those factors? Is it running separate portfolios and rebalancing? Using multiple screens? No one knows.

For example, how would I go about estimating the value loading of QSPIX?


I've been assuming that for the equities portion of the fund they're running the same game as in QLEIX-- factor loads around 0.6 or so. But for this and their other factor-targeted long/short funds, would be nice if they just came out and told us what loadings they expect to hit.

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Re: QSPIX - thoughts on interesting fund

Postby backpacker » Tue Jun 16, 2015 11:32 pm

lack_ey wrote:
backpacker wrote:
Johno wrote: As someone else said on this or earlier thread, it's more like multiplicity than conceptual complication. They are using simple instruments (no options AFAIK, just futures, cash stocks and other simple cash underlyings). It's true there are pretty many (factors, markets) but that also cuts against the argument it's a time bomb, since a lot of different things have to go wrong for it blow up.


I understand that this fund is targeting several factors. But how is it targeting those factors? Is it running separate portfolios and rebalancing? Using multiple screens? No one knows.

To take a simple question: How would I go about estimating the value loading of QSPIX?


I think they have papers on quantifying and assessing value measures in equities that you can look for. The "Investing with Style" and some of the more general descriptions describe value as just price/book, but in general they (and most others) say that value is better defined by combining different measures, so you'd think they'd be using multiple measures.


If AQR is "just using simple style strategies" there should be no need run them in a black box. AQR should be able to fully describe how the various strategies are constructed and weighted without destroying the effectiveness of those strategies. I can understand keeping some details private to prevent front-running. But they should be able to describe what the fund does with roughly the precision of, say, a typical Vanguard index fund. If they can't or won't do that, it's because they think that this fund is more than just a bundle of simple factor strategies. In which case, we have no idea whether that "more" is a feature or a bug. How could we? "AQR is run by smart people who have sometimes beat the market" is not a good argument, not the sort of thing that will get an investor through 10+ years of underperformance.

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Re: QSPIX - thoughts on interesting fund

Postby backpacker » Tue Jun 16, 2015 11:33 pm

Jebediah wrote:
backpacker wrote:
Johno wrote: As someone else said on this or earlier thread, it's more like multiplicity than conceptual complication. They are using simple instruments (no options AFAIK, just futures, cash stocks and other simple cash underlyings). It's true there are pretty many (factors, markets) but that also cuts against the argument it's a time bomb, since a lot of different things have to go wrong for it blow up.


I understand that this fund is targeting several factors. But how is it targeting those factors? Is it running separate portfolios and rebalancing? Using multiple screens? No one knows.

For example, how would I go about estimating the value loading of QSPIX?


I've been assuming that for the equities portion of the fund they're running the same game as in QLEIX-- factor loads around 0.6 or so. But for this and their other factor-targeted long/short funds, would be nice if they just came out and told us what loadings they expect to hit.


I agree. And, it would be nice if there were a way to independently verify whether they are hitting those targets.

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Re: QSPIX - thoughts on interesting fund

Postby backpacker » Tue Jun 16, 2015 11:44 pm

HomerJ wrote:
lack_ey wrote:Does it really matter how this is done, if it's done reasonably well?

There's all kind of things I could invest in, and not care how the investments are handled, as long as I assume the people handling the money are doing it "reasonably well".


This. Active managers target factors. Active managers have models. Active managers have smart quants. What makes this fund different? I'm happy investing in "smart beta" funds because I can see what my funds are doing. I can generate my own estimates of their factor loadings and their future expected returns. Without more transparency, investing in QSPIX is IMO just handing your money to an active manager, one with a shiny new fund charging a 1.5% fee.

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Re: QSPIX - thoughts on interesting fund

Postby lack_ey » Wed Jun 17, 2015 12:46 am

HomerJ wrote:
lack_ey wrote:Does it really matter how this is done, if it's done reasonably well?


Heh, the crux of the matter.

"If it's done reasonably well". Pretty big if there.

There's all kind of things I could invest in, and not care how the investments are handled, as long as I assume the people handling the money are doing it "reasonably well".

Just to be sure we're talking about the same thing, I'm somewhat separating strategy from execution. There are a number of losing investment strategies and assets I would not invest in no matter how well any manager executes them. Personally I would fear the parts out of their control (such as how well each of the styles works in the future, market shocks, etc.) a lot more than the low-level details of how trades are made and individual securities are analyzed in the context of filling up the style allocations, and so I am downplaying the latter.

For index funds we can gauge execution by tracking error and consistency in security parameters with that of the index. When Vanguard total bond index trails the index by about 2% in 2002-2003, that is from poor execution (though the difference in composition was somewhat deliberate here, caused by the weightings and credit loadings versus the index).

For a fund like this, execution is relatively more complicated than for an index fund, but like I said, I don't imagine it much a concern relative to other issues.

In other words, I would say that they are executing their strategy reasonably well if they are maintaining all the factor exposures as planned, generally hitting somewhere around targeted volatilities, and keeping transactional costs relatively low given what is going on. This is regardless of whether or not doing all that makes money or not, which is largely dependent on underlying strategy performance. Note that there is a tradeoff between maximum factor exposures and reducing transaction costs. I would expect that they have relatively high expertise in mining securities for factor exposures and managing them as those change. Same for DFA.

When I reference AQR's track record, it is with respect to the presumed reasonably competent ability to execute on ideas. If the ideas are wrong in the first place, that is another matter and the more pressing one, in my opinion.


backpacker wrote:
lack_ey wrote:
backpacker wrote:
Johno wrote: As someone else said on this or earlier thread, it's more like multiplicity than conceptual complication. They are using simple instruments (no options AFAIK, just futures, cash stocks and other simple cash underlyings). It's true there are pretty many (factors, markets) but that also cuts against the argument it's a time bomb, since a lot of different things have to go wrong for it blow up.


I understand that this fund is targeting several factors. But how is it targeting those factors? Is it running separate portfolios and rebalancing? Using multiple screens? No one knows.

To take a simple question: How would I go about estimating the value loading of QSPIX?


I think they have papers on quantifying and assessing value measures in equities that you can look for. The "Investing with Style" and some of the more general descriptions describe value as just price/book, but in general they (and most others) say that value is better defined by combining different measures, so you'd think they'd be using multiple measures.


If AQR is "just using simple style strategies" there should be no need run them in a black box. AQR should be able to fully describe how the various strategies are constructed and weighted without destroying the effectiveness of those strategies. I can understand keeping some details private to prevent front-running. But they should be able to describe what the fund does with roughly the precision of, say, a typical Vanguard index fund. If they can't or won't do that, it's because they think that this fund is more than just a bundle of simple factor strategies. In which case, we have no idea whether that "more" is a feature or a bug. How could we? "AQR is run by smart people who have sometimes beat the market" is not a good argument, not the sort of thing that will get an investor through 10+ years of underperformance.

I wish they would disclose more too. I suspect that they keep things under wraps in part to be able to change them as they see fit, say if new analyses indicate better methods in the future, or if new market conditions make certain things less profitable for whatever reasons. Like I said in a previous post way back, I mentioned a chance of future monkeying around making the fund worse a possibility (though not a great or very serious one).

That said, I would not be very much troubled by something like the equity value measure being a combination of multiple statistics rather than straight-up price/book. If they have a secret sauce to determine value there, sure. If they add a profitability screen, more power to them. To me, this would still be a simple factor strategy for the value/equity combination. I don't know if that's your conception or not. Whether or not they are internally running multiple portfolios or adjust all the securities in one big pot to achieve the desired loadings is not a big deal to me as long as the method achieves the objectives.

At any rate, there is a lot more documentation and writings here for the fund than for most any other fund out there (more marketing, some would say), so I don't think there is much expectation for them to spill more of the beans. We can all hope, but I wouldn't expect to see more. Look at something like Vanguard's global minimum volatility fund. They are definitely not telling you how they select individual securities and how their correlation projections work, and how they balance choosing low-volatility assets with those that have not quite as low volatility but lower correlations to existing securities. Look at iShares's multifactor equity index funds. Many of the low-level details are not covered by the fund provider or the index provider. They're not going to tell you factor loadings either.

backpacker wrote:
HomerJ wrote:
lack_ey wrote:Does it really matter how this is done, if it's done reasonably well?

There's all kind of things I could invest in, and not care how the investments are handled, as long as I assume the people handling the money are doing it "reasonably well".


This. Active managers target factors. Active managers have models. Active managers have smart quants. What makes this fund different? I'm happy investing in "smart beta" funds because I can see what my funds are doing. I can generate my own estimates of their factor loadings and their future expected returns. Without more transparency, investing in QSPIX is IMO just handing your money to an active manager, one with a shiny new fund charging a 1.5% fee.

The primary distinguishing features are the long/short exposure (the short side being ignored by smart beta), the multifactor approach (though that is found in some other funds these days, though perhaps not with the same factors), and exposures to these aspects in asset classes other than stocks. If you don't value those things, then obviously you would want your exposures with some other fund that's probably a lot cheaper.

For what it's worth, the low-volatility version has a 0.85% ER. I wonder what the reaction would be if the main fund were the low volatility version. It would have less leverage (wow, less evil), lower costs (nice), and lower exposures (nobody knows what these are anyway!). On a side note, that's a lower cost than Vanguard's new alternative strategies fund, while playing in much the same space. That is, if they actually release that thing. I think it was supposed to be launched already, but I don't see it anywhere. It is supposed to have an ER of 1.1%.

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Re: A second look at QSPIX

Postby nisiprius » Wed Jun 17, 2015 8:34 am

Oliver wrote:
Taylor Larimore wrote:I decided to take another look by going to Morningstar... QSPIX has an estimated 10-year cost of $2,944. For comparison, Vanguard Total Stock Market Admiral (VTSAX) has an estimated 10-year cost of $64
Morningstar is a great source of information. However, the 10-year cost does not reflect the 1.5% expense cap. The one year expense for a $10,000 investment would be around $150. The 10-year cost would be closer to $1,500 than Morningstar's estimate of $2,944. (Obviously, QSPIX is more expensive than a cap weighted index fund.)
The 10-year cost is $2,944 for class I (minimum investment $5 million), $3,282 for class N (minimum investment $1 million).

That's not Morningstar's estimate, it's AQR's. The prospectus says that the estimate assumes 5% annual return and that it takes into account the fee waiver. From the prospectus for QSPIX

Image

I assume there are options for a retail brokerage investor to access these with less than $1 million; those who know what they are, can you get the class I shares or only the class N? Perhaps a retail investor can only get them via an advisor, with an advisory fee added?
Last edited by nisiprius on Wed Jun 17, 2015 8:44 am, edited 4 times in total.
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Re: A second look at QSPIX

Postby matjen » Wed Jun 17, 2015 8:38 am

nisiprius wrote:...The prospectus says that the estimate assumes 5% annual return..."


Although Nisi wrote it, I want to call it out. The 5% assumed return is what raises the estimated cost it seems to me.
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Re: QSPIX - thoughts on interesting fund

Postby backpacker » Wed Jun 17, 2015 9:14 am

lack_ey wrote:
backpacker wrote: [AQR] should be able to describe what the fund does with roughly the precision of, say, a typical Vanguard index fund. If they can't or won't do that, it's because they think that this fund is more than just a bundle of simple factor strategies. In which case, we have no idea whether that "more" is a feature or a bug. How could we?


I wish they would disclose more too. I suspect that they keep things under wraps in part to be able to change them as they see fit, say if new analyses indicate better methods in the future, or if new market conditions make certain things less profitable for whatever reasons. Like I said in a previous post way back, I mentioned a chance of future monkeying around making the fund worse a possibility (though not a great or very serious one).


I agree. This is one of my main concerns too. It doesn't take much to turn a great fund into a mediocre fund or a mediocre fund into a bad fund. Take the recent brouhaha over PXSV switching from the RAFI pure small value index to the Russell pure small value index. The fund has always been a small value fund. It has always had "the same strategy" and targeted the "same factors". But a switch in implementation has turned a great fund into what is at best a mediocre fund. At least that's the general consensus, one that I agree with.

If there's anything that I've learned reading about value, it's that implementation is everything. Active funds have been targeting "value stocks" for years but have not substantially outperformed active growth funds. Russell's small indexes have lost well over 1% a year to front running. Guggenheims' small value funds have negative momentum. Vanguard's value funds have universally failed to beat their growth counterparts since inception, even though the value factor has been positive over the same period. Factor investing may give your portfolio an edge, but it's a small edge, one easily overwhelmed by poor implementation.

Maybe some think that AQR is "just too smart" to make similar mistakes. But given the lack of transparency, there's no way to know. Trust but verify.

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Re: QSPIX - thoughts on interesting fund

Postby matjen » Wed Jun 17, 2015 9:23 am

backpacker wrote:
lack_ey wrote:
backpacker wrote: [AQR] should be able to describe what the fund does with roughly the precision of, say, a typical Vanguard index fund. If they can't or won't do that, it's because they think that this fund is more than just a bundle of simple factor strategies. In which case, we have no idea whether that "more" is a feature or a bug. How could we?


I wish they would disclose more too. I suspect that they keep things under wraps in part to be able to change them as they see fit, say if new analyses indicate better methods in the future, or if new market conditions make certain things less profitable for whatever reasons. Like I said in a previous post way back, I mentioned a chance of future monkeying around making the fund worse a possibility (though not a great or very serious one).


I agree. This is one of my main concerns too. It doesn't take much to turn a great fund into a mediocre fund or a mediocre fund into a bad fund. Take the recent brouhaha over PXSV switching from the RAFI pure small value index to the Russell pure small value index. The fund has always been a small value fund. It has always had "the same strategy" and targeted the "same factors". But a switch in implementation has turned a great fund into what is at best a mediocre fund.

If there's anything that I've learned reading about value, it's that implementation is everything. Active funds have been targeting "value stocks" for years but have not substantially outperformed active growth funds. Russell's small indexes have lost well over 1% a year to front running. Guggenheims' small value funds have negative momentum. Vanguard's value funds have universally failed to beat their growth counterparts since inception, even though the value factor has been positive over the same period. Factor investing may give your portfolio an edge, but it's a small edge, one easily overwhelmed by poor implementation.

Maybe some think that AQR is "too smart" to make similar mistakes. But given the lack of transparency, there's no way to know. Trust but verify.


I think that AQR and DFA are different from your examples and that is one of the things you are paying for. They don't rely on other's indexes. They construct their own strategies. Like you said...implementation is important and they control it. Lasse Pedersen called that out as a real eye opener when moving back and forth from academia to applied in his recent book Efficiently Inefficient. http://www.amazon.com/Efficiently-Ineff ... e+pedersen

More in this thread: viewtopic.php?f=10&t=167453&p=2518752#p2518752
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Re: A second look at QSPIX

Postby backpacker » Wed Jun 17, 2015 9:25 am

matjen wrote:
nisiprius wrote:...The prospectus says that the estimate assumes 5% annual return..."


Although Nisi wrote it, I want to call it out. The 5% assumed return is what raises the estimated cost it seems to me.


The tyranny of compounding costs.

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Re: QSPIX - thoughts on interesting fund

Postby backpacker » Wed Jun 17, 2015 9:31 am

matjen wrote:
backpacker wrote: It doesn't take much to turn a great fund into a mediocre fund or a mediocre fund into a bad fund. Take the recent brouhaha over PXSV switching from the RAFI pure small value index to the Russell pure small value index. The fund has always been a small value fund. It has always had "the same strategy" and targeted the "same factors". But a switch in implementation has turned a great fund into what is at best a mediocre fund.

If there's anything that I've learned reading about value, it's that implementation is everything. Active funds have been targeting "value stocks" for years but have not substantially outperformed active growth funds. Russell's small indexes have lost well over 1% a year to front running. Guggenheims' small value funds have negative momentum. Vanguard's value funds have universally failed to beat their growth counterparts since inception, even though the value factor has been positive over the same period. Factor investing may give your portfolio an edge, but it's a small edge, one easily overwhelmed by poor implementation.

Maybe some think that AQR is "too smart" to make similar mistakes. But given the lack of transparency, there's no way to know. Trust but verify.


I think that AQR and DFA are different from your examples and that is one of the things you are paying for. They don't rely on other's indexes. They construct their own strategies. Like you said...implementation is important and they control it.


Traditional active funds also "construct their own strategies" using quantitative models. One of the advantages of smart beta strategies is that if your fund switches strategies, you'll know. You can then asses whether you like the switch and find a different fund if you don't like it. Buying funds from AQR, you'll never even know when the switch happens, let a lone be in a position to assess whether it makes sense or is something you want.

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Re: QSPIX - thoughts on interesting fund

Postby matjen » Wed Jun 17, 2015 9:37 am

backpacker wrote:
matjen wrote:
backpacker wrote: It doesn't take much to turn a great fund into a mediocre fund or a mediocre fund into a bad fund. Take the recent brouhaha over PXSV switching from the RAFI pure small value index to the Russell pure small value index. The fund has always been a small value fund. It has always had "the same strategy" and targeted the "same factors". But a switch in implementation has turned a great fund into what is at best a mediocre fund.

If there's anything that I've learned reading about value, it's that implementation is everything. Active funds have been targeting "value stocks" for years but have not substantially outperformed active growth funds. Russell's small indexes have lost well over 1% a year to front running. Guggenheims' small value funds have negative momentum. Vanguard's value funds have universally failed to beat their growth counterparts since inception, even though the value factor has been positive over the same period. Factor investing may give your portfolio an edge, but it's a small edge, one easily overwhelmed by poor implementation.

Maybe some think that AQR is "too smart" to make similar mistakes. But given the lack of transparency, there's no way to know. Trust but verify.


I think that AQR and DFA are different from your examples and that is one of the things you are paying for. They don't rely on other's indexes. They construct their own strategies. Like you said...implementation is important and they control it.


Traditional active funds also "construct their own strategies" using quantitative models. One of the advantages of smart beta strategies is that if your fund switches strategies, you'll know. You can then asses whether you like the switch and find a different fund if you don't like it. Buying funds from AQR, you'll never even know when the switch happens, let a lone be in a position to assess whether it makes sense or is something you want.


Other than the prospectus and various other sorts of disclosures...

I presume you must be talking about minor valuation/weighting/tactical decisions. Well, that is part of the sauce. Everyone knows when an index has to dump or add a position (though some of the modern ones may have buffer zones and the like which also aren't disclosed it seems to me). DFA/AQR can slow trade, etc. and this adds value.
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Re: A second look at QSPIX

Postby matjen » Wed Jun 17, 2015 9:59 am

backpacker wrote:
matjen wrote:
nisiprius wrote:...The prospectus says that the estimate assumes 5% annual return..."


Although Nisi wrote it, I want to call it out. The 5% assumed return is what raises the estimated cost it seems to me.


The tyranny of compounding costs.


backpacker it appears I have been hoisted with my own petard! :-)

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Re: A second look at QSPIX

Postby rrppve » Wed Jun 17, 2015 11:31 am

nisiprius wrote:
Oliver wrote:
Taylor Larimore wrote:I decided to take another look by going to Morningstar... QSPIX has an estimated 10-year cost of $2,944. For comparison, Vanguard Total Stock Market Admiral (VTSAX) has an estimated 10-year cost of $64
Morningstar is a great source of information. However, the 10-year cost does not reflect the 1.5% expense cap. The one year expense for a $10,000 investment would be around $150. The 10-year cost would be closer to $1,500 than Morningstar's estimate of $2,944. (Obviously, QSPIX is more expensive than a cap weighted index fund.)
The 10-year cost is $2,944 for class I (minimum investment $5 million), $3,282 for class N (minimum investment $1 million).

That's not Morningstar's estimate, it's AQR's. The prospectus says that the estimate assumes 5% annual return and that it takes into account the fee waiver. From the prospectus for QSPIX

Image

I assume there are options for a retail brokerage investor to access these with less than $1 million; those who know what they are, can you get the class I shares or only the class N? Perhaps a retail investor can only get them via an advisor, with an advisory fee added?

The $2,944 only assumes the fee waiver is in effect for 1 year, not 10 years.
Don't think anyone believes it is a low cost fund. As has been stated multiple times in this thread, the fund including its fees, needs to be looked at as part of a portfolio not as a pure stand-alone investment. Assuming that it is <20% of one's portfolio, it seems to me that the fees are reasonable given the fund's pretty unique diversification effects.
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Re: QSPIX - thoughts on interesting fund

Postby lack_ey » Wed Jun 17, 2015 1:05 pm

backpacker wrote:Traditional active funds also "construct their own strategies" using quantitative models. One of the advantages of smart beta strategies is that if your fund switches strategies, you'll know. You can then asses whether you like the switch and find a different fund if you don't like it. Buying funds from AQR, you'll never even know when the switch happens, let a lone be in a position to assess whether it makes sense or is something you want.

I think you mean smart beta funds based on indexes? I'm not sure the disclosure is that clear or good on the whole range of tilted equity funds.

backpacker wrote:If there's anything that I've learned reading about value, it's that implementation is everything. Active funds have been targeting "value stocks" for years but have not substantially outperformed active growth funds. Russell's small indexes have lost well over 1% a year to front running. Guggenheims' small value funds have negative momentum. Vanguard's value funds have universally failed to beat their growth counterparts since inception, even though the value factor has been positive over the same period. Factor investing may give your portfolio an edge, but it's a small edge, one easily overwhelmed by poor implementation.

Maybe some think that AQR is "just too smart" to make similar mistakes. But given the lack of transparency, there's no way to know. Trust but verify.

This is a matter of perspective and I would lump most of these problems as inherent to the strategy and not a problem of execution or implementation. If the goal is to buy small and value stocks according to an index, and they are doing that properly, then they have succeeded. Problems such as getting frontrun, having negative momentum, and everything else are weaknesses with the approaches taken, some of which may be unknown prior to the fund underperforming expectations. If growth isn't as bad as expected and value not as good as expected in individual stocks because of real-world inclusion and investability screens, that just means that the effect in actual funds will be smaller than predicted by naive reading of raw CRSP data, and that the strategy followed by real funds isn't as powerful as some may have expected. Maybe I consider too little to be implementation that I make that aspect meaningless.

In any case, to me these are all reasons to favor a non-indexed, less transparent approach when tilting. It sure hasn't helped traditional active managers much, but there are things to be said for managing your own portfolio that doesn't get frontrun, being able to adapt to new information, and so on. DFA has been among the most successful running tilts over the years.

These concerns, which primarily deal with challenges of capturing factors in individual stocks, are further reasons to prefer AQR's style premia fund. The majority of the risk weighting (and an even larger majority by dollar allocation) is outside individual stocks, being instead in the country stock indexes, bonds, currencies, and commodities. I would have expected more enthusiasm from dedicated equity tilters to pursue these concepts in other asset classes, but apparently not so.

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Re: QSPIX - thoughts on interesting fund

Postby countmein » Wed Jun 17, 2015 4:25 pm

Was just told by Scottrade rep that QSPIX is available, I class, in taxable and IRAs, $17 transaction fee, $100 minimum.

Regarding the ER... I'm starting to fret...Seriously, how is it possible that it's only 1.50%? The div on short sales + other + acquired fund fees = 1.26%. The management fee is 1.35%. For a grand total of 2.61%.

For the total ER to be 1.50%, AQR would have to reduce their management fee down to 0.24%. Is this truly happening? I'm skeptical. The blurb on their website says:

The Adviser has contractually agreed to waive its management fee and/or reimburse expenses to the extent necessary to maintain the Total Annual Fund Operating Expenses at the stated levels. These expense caps are exclusive of expenses that may apply to some of the Funds, such as acquired fund fees, expenses related to short and borrowing costs and extraordinary expenses. See the Prospectus for additional details.

I don't know, but that sounds to me like the ER is going to be greater than 1.50%.

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Re: A second look at QSPIX

Postby countmein » Wed Jun 17, 2015 4:33 pm

rrppve wrote:
nisiprius wrote:
Oliver wrote:
Taylor Larimore wrote:I decided to take another look by going to Morningstar... QSPIX has an estimated 10-year cost of $2,944. For comparison, Vanguard Total Stock Market Admiral (VTSAX) has an estimated 10-year cost of $64
Morningstar is a great source of information. However, the 10-year cost does not reflect the 1.5% expense cap. The one year expense for a $10,000 investment would be around $150. The 10-year cost would be closer to $1,500 than Morningstar's estimate of $2,944. (Obviously, QSPIX is more expensive than a cap weighted index fund.)
The 10-year cost is $2,944 for class I (minimum investment $5 million), $3,282 for class N (minimum investment $1 million).

That's not Morningstar's estimate, it's AQR's. The prospectus says that the estimate assumes 5% annual return and that it takes into account the fee waiver. From the prospectus for QSPIX

Image

I assume there are options for a retail brokerage investor to access these with less than $1 million; those who know what they are, can you get the class I shares or only the class N? Perhaps a retail investor can only get them via an advisor, with an advisory fee added?

The $2,944 only assumes the fee waiver is in effect for 1 year, not 10 years.


Forget 10 years. The 1 year cost is $264...That's 2.64%

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Re: QSPIX - thoughts on interesting fund

Postby Ketawa » Wed Jun 17, 2015 10:41 pm

countmein wrote:Was just told by Scottrade rep that QSPIX is available, I class, in taxable and IRAs, $17 transaction fee, $100 minimum.

Regarding the ER... I'm starting to fret...Seriously, how is it possible that it's only 1.50%? The div on short sales + other + acquired fund fees = 1.26%. The management fee is 1.35%. For a grand total of 2.61%.

For the total ER to be 1.50%, AQR would have to reduce their management fee down to 0.24%. Is this truly happening? I'm skeptical. The blurb on their website says:

The Adviser has contractually agreed to waive its management fee and/or reimburse expenses to the extent necessary to maintain the Total Annual Fund Operating Expenses at the stated levels. These expense caps are exclusive of expenses that may apply to some of the Funds, such as acquired fund fees, expenses related to short and borrowing costs and extraordinary expenses. See the Prospectus for additional details.

I don't know, but that sounds to me like the ER is going to be greater than 1.50%.


I think it's as simple as this.

Image

Management Fee + All Other Expenses = 1.50%

Acquired fund fees are commonly ignored. This also was the case for some Vanguard funds like VBR until it switched to CRSP indexes. Before then, it had acquired fund fees, but people subtracted them to find the true ER. Acquired fund fees are not a charge for owning the fund, but sort of an accounting thing. The wiki goes into a little more detail here.

Dividends on Short Sales don't matter, as I wrote here:

Ketawa wrote:Dividends paid on shorts are not an actual expense, which is one reason 2.61% is not the cost of owning the fund. When you pay a dividend on a short, the short rises in value by approximately the amount of the dividend.

It's the exact opposite of receiving dividends on longs. A fund's NAV falls by the amount of the dividend. If Vanguard Total Stock Market has a 2% yield, that doesn't mean that it has a negative expense ratio.


You can also check the AQR page for N shares and see that the same ideas hold.

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Re: QSPIX - thoughts on interesting fund

Postby backpacker » Wed Jun 17, 2015 10:58 pm

lack_ey wrote: This is a matter of perspective and I would lump most of these problems as inherent to the strategy and not a problem of execution or implementation. If the goal is to buy small and value stocks according to an index, and they are doing that properly, then they have succeeded. Problems such as getting frontrun, having negative momentum, and everything else are weaknesses with the approaches taken, some of which may be unknown prior to the fund underperforming expectations. If growth isn't as bad as expected and value not as good as expected in individual stocks because of real-world inclusion and investability screens, that just means that the effect in actual funds will be smaller than predicted by naive reading of raw CRSP data, and that the strategy followed by real funds isn't as powerful as some may have expected. Maybe I consider too little to be implementation that I make that aspect meaningless.

In any case, to me these are all reasons to favor a non-indexed, less transparent approach when tilting. It sure hasn't helped traditional active managers much, but there are things to be said for managing your own portfolio that doesn't get frontrun, being able to adapt to new information, and so on. DFA has been among the most successful running tilts over the years.

These concerns, which primarily deal with challenges of capturing factors in individual stocks, are further reasons to prefer AQR's style premia fund. The majority of the risk weighting (and an even larger majority by dollar allocation) is outside individual stocks, being instead in the country stock indexes, bonds, currencies, and commodities. I would have expected more enthusiasm from dedicated equity tilters to pursue these concepts in other asset classes, but apparently not so.


DFA's adoption of profitability screens is IMO an example of one of the reasons to not own a fund that "adapts" to new information. I'm not convinced that there is any such thing a profitability premium. The main reason is that factors like value can be measured in various ways with similar results (it's "invariant" under various simple "transformations"). Take price and divide it by just about anything and you'll bet a value premium (book value, employees, sales, earnings, dividends, cashflow...). Novy-Marx would have us believe that there is a profitability premium, but that you have to measure it precisely the right way , i.e. you have to use gross profitability. Others ways of doing it won't work. Real factors with real premiums IMO shouldn't be so finicky. My impression is that DFA has incorporated profitability into their funds mostly for marketing reasons, not because the research has demonstrated any real benefit. That's a kind of "adaption", but it's from my perspective, it's just adding complexity based on nothing more than a bit of clever data mining.

I do like the idea of using value in places other than just stocks. I'm not opposed in principle. For myself, I just don't have a "feel" for how those other strategies work. I would rather hold a portfolio that I understand than hold a potentially "better" portfolio that I don't understand. I find it amazing that other non-professional investors claim to have read a few AQR pamphlets and "understand" all 20+ "simple" strategies this fund is implementing. I can't. If you haven't spent at least a few years reading and thinking about an investment strategy, how can you have any good feel for why it works and why its sensible? I want to understand what I'm doing well enough to be happy holding the same funds I'm holding now after 10+ years of severe underperformance. I'm skeptical that many of the folks buying this fund are at that point with its 20+ "simple" factor strategies.

Thanks lack_ey, by the way, for a great conversation. :beer

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Re: QSPIX - thoughts on interesting fund

Postby lack_ey » Wed Jun 17, 2015 11:57 pm

A lot of it has to do with the level of conviction and philosophy of an investor. If anyone prefers more control and more rigid implementations, that is very understandable.

This fund is kind of the shotgun-style approach to factor investing. For the twenty-three year backtest cited in the main paper, three of the asset class/style combinations have negative Sharpe ratios and a fourth has 0! That said, the negative ones are close to 0 with the worst being -0.11. That is, these individual strategies each did worse (alone) than holding T-bills. On the one hand, people are calling data mining on the strategy as a whole, but reported results include weightings that do not screen out the worse performers or really finagle with overweightings to whatever did better.

Again, my thinking when it comes to something like profitability (something I have researched even less) is that it may have had some effect in the past and may possibly have some effect in the future. But I would wager that it is more likely to help than to hurt, and thus would be ambivalent to or mildly supportive of funds taking it into consideration if doing so costs very little. That's basically how it goes for all the asset class/style combinations here. There may be a few or several duds in there, but I probably wouldn't be able to pick them out beforehand. Thing is, they don't all need to work (just enough of them), and fund performance isn't affected by whether or not one understands why they do what they do. In fact, the reasons aren't even fully understood by anyone, including the fund managers. There could be a variety of causes. It's hard to say.

Furthermore, it doesn't matter if—let's pick on one of the styles—it turns out defensive isn't actually economically justified and is dominated and explained by some more robust factor or explanation, so long as it's correlated with something that works. That way, even if you're loading on the wrong, suboptimal thing, maybe you still make money. By the way, the defensive style may or may not be incorporating profitability (and stable earnings, low leverage) in addition to say beta. That is suggested in the one paper, but they are not very specific about it in the fund prospectus, as with the other styles.

I don't think that a lot of the asset class/style combinations are that esoteric and require much studying. I have yet to do the deep dive myself on a few of them (note: I don't own the fund... yet), but I think many should be familiar to investors. In carry, for example, though currency carry is the most famous of the applications, the others I think are simpler and even less controversial. Carry in commodities is defined here as loading up on whatever is more in backwardation and shorting whatever is in contango. I think the financial reasons are obvious, even if the underlying economic pricing and supply-and-demand are complicated. Some commodity ETFs actually actively screen for contango; this is fairly uncontroversial. They define carry in bonds as loading up on the bonds (i.e. which government's) that currently benefit from a steep yield curve. This is a very common strategy in fixed income repeated elsewhere by many of the experts here in fixed income, in addition to buying when real yields are high (this is their definition of value in bonds) and taking on credit risk when credit yield spreads are high. For momentum, there's a lot written about that, but I think that if one believes in momentum in one asset class, they probably believe it for all of them, so that's that. I haven't looked through the literature for this, but I wouldn't be surprised if there's not much there to find either.

Anyway, I appreciate the range of opinions and thoughtful responses here too.

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Re: QSPIX - thoughts on interesting fund

Postby tarheel » Thu Jun 18, 2015 6:00 am

backpacker wrote:
lack_ey wrote: I find it amazing that other non-professional investors claim to have read a few AQR pamphlets and "understand" all 20+ "simple" strategies this fund is implementing. I can't. If you haven't spent at least a few years reading and thinking about an investment strategy, how can you have any good feel for why it works and why its sensible?


I understand the strategies at a moderate level, really like the concept, and then see what professionals have to say about it. Larry Swedroe and his firm have vouched for both AQR and QSPIX specifically. As mentioned before, Larry has somewhere around a 3% allocation to it, which is half of what I have. Larry's portfolio is many times the size of mine. That is good enough for me.

I appreciate the spirit of trying to understand every potential detail of what is going on here, but how many layers of the onion does one need to peel off? Personally, I will never have more than a 10% allocation ever so a few layers is enough for me.

If you're a tilter (which I would assume a QSPIX investor is) do you understand EVERYTHING about your SCV fund? Whether DFSVX/VISVX/VBR/QSMLX there are going to be things you don't know. Your SCV allocation is probably some multiple of your QSPIX allocation as well (for me it's about x 4) You make your best attempt at understanding, and then invest. There are more than enough professionals that one can seek out for opinions.

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Re: QSPIX - thoughts on interesting fund

Postby packer16 » Thu Jun 18, 2015 6:37 am

For me at least this fund is trying to do a 10 complexity task when I feel comfortable with a 1. SCV is a time tested strategy and I have implemented it myself by buying stocks for less than they are worth. The advantages are you can be wrong about a number of the valuation inputs and still have an outstanding return if you buy cheap enough. Most of these cheap stock happen to be small and less followed that is why I think SCV does better than LCV. Now you implement this in a number of ways. I just buy individual cheap stocks. You can buy Vanguard's or any number of other vendors cheap SCV index funds or you can buy an active managers value funds. In the later case you need to be selective because the fees are higher than an index fund to ensure the tilt away from the index is worth more than the incremental fees. There is more than enough work to be done to master the SCV tilt in terms of things like how much concentration and in what names across what countries to keep busy for along time.

Multiply this by 20x possible factor/market combos and you have a truly giant task. I think it is too complex for anyone to understand because of the influences of behavioral factors across all the factors. I also question the benefit of many of these factor/asset class combinations due to their low expected returns (like shorting, commodities and currency). I think it makes more sense to focus on the highest expected return factor/market combos versus investing in a large combination of these some of which I have no desire to own. Most of which have high implementation costs. IMO investing is about buying cash flows from businesses and assets for cheap and SCV provides me the best way to that in least expensive way. With SCV I know what I am getting vs. for example a currency short momentum factor. For my money, I think a simple SCV tilted fund or group of SCV stocks from around the world should handily outperform this with alot less fees.

To me, what these guys are doing is what the guys at LTMC tried to do. They set up these theoretically hedged positions then have to add 3 to 4 x leverage to make the returns reasonable. What this can lead to is others doing a similar strategy with more leverage blowing up and it effecting this strategy. The risk of error is multiplicative because of the timing and weighting of each strategy at a given time. IMO opinion folks are focusing on the ends without understanding that the means to get there is a very complex task with alot of potential for error.

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Re: QSPIX - thoughts on interesting fund

Postby grap0013 » Thu Jun 18, 2015 7:13 am

tarheel wrote:
If you're a tilter (which I would assume a QSPIX investor is) do you understand EVERYTHING about your SCV fund? Whether DFSVX/VISVX/VBR/QSMLX there are going to be things you don't know. Your SCV allocation is probably some multiple of your QSPIX allocation as well (for me it's about x 4) You make your best attempt at understanding, and then invest. There are more than enough professionals that one can seek out for opinions.


Nope, but I know all those tickers by heart! Does that count?! :-)

I think tilters tolerate higher ERs because they have to in order to get the funds they want. My portfolio ER before QSPIX was 0.39 and now it's 0.49 I don't think that's too crazy high. I know there is the "cost matters hypothesis" but there is also the "all that matters over the long haul is factor exposure" hypothesis.
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Re: QSPIX - thoughts on interesting fund

Postby lack_ey » Thu Jun 18, 2015 11:11 am

packer16 wrote:To me, what these guys are doing is what the guys at LTMC tried to do. They set up these theoretically hedged positions then have to add 3 to 4 x leverage to make the returns reasonable. What this can lead to is others doing a similar strategy with more leverage blowing up and it effecting this strategy. The risk of error is multiplicative because of the timing and weighting of each strategy at a given time. IMO opinion folks are focusing on the ends without understanding that the means to get there is a very complex task with alot of potential for error.

This entire thread is full of posts about possible potentials for error, including by me, and yet virtually nobody has even scratched the surface of addressing the theoretical basis and future expected returns from each of the styles. There's a lot more to go.

Anyway, LTCM's strategy, targeted returns, etc. were all very different. And the leverage was more on the order of 50:1 (before positions went south and it went up to more like 250:1). Yes, there are plenty of reasons to be cautious here, but bringing up LTCM is helping nobody here understand what is going on.

packer16 wrote:I also question the benefit of many of these factor/asset class combinations due to their low expected returns (like shorting, commodities and currency).

How do you determine the expected returns of SCV? It would be helpful to understand what people think the expected returns of these other styles are and why. Maybe some of the fund owners are missing analyses and points of concern.

packer16 wrote:With SCV I know what I am getting vs. for example a currency short momentum factor.

At what level do you not get what is being done? I didn't check their docs or anything, but to me "currency short momentum" would imply taking a short position on currencies that have recently been depreciating. In practice one would need to more rigorously define "recently" to be able to implement that, but usually some kind of 1-month, 3-month, 12-month, etc. trend is cited and used. It's not anything that complicated, so do you really not know what you're getting here? No, none of us know exactly how their trading algorithms work at a low level, but is this aspect the deal breaker or is it the rest?

packer16 wrote:For my money, I think a simple SCV tilted fund or group of SCV stocks from around the world should handily outperform this with alot less fees.

This is entirely missing the point. Nobody wants to or considers using this as a replacement for anything. It's a potential supplement, just like everything in the alternatives space, and one that doesn't source a large part of its returns from equity market beta, unlike SCV. By this logic, there's no reason to own bonds or anything other than SCV stocks. After all, bonds have lower expected returns than SCV stocks. Even if you leverage them up to 10% standard deviation or so (or just use long-term bonds).

Some people justify bonds as a kind of safe haven, but really, if that's all you want, you should use cash instead and have less risk. If one seriously considers bonds or other assets than stocks as sources of return in some sense in certain market conditions (including ones in which stocks are getting hammered or perhaps are flat or who knows what else), then that is in theory what we have here too.

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Re: QSPIX - thoughts on interesting fund

Postby nedsaid » Thu Jun 18, 2015 4:41 pm

It is clear to me that I understand part of what is supposed to make this fund work but that there are things that I don't have a full grasp of. I have been a "plain vanilla" investor, investing in index funds, active mutual funds, ETF's based on indexes, and individual stocks. I owned zero coupon treasuries at one time and also a brokered CD. I have never shorted, purchased options, invested in commodities, played the currency markets, or bought futures.

My favorite mutual fund company will be offering alternatives funds, in fact they have hired people and will have a division of their company dealing with alternatives. I am awfully temped to buy one of these when offered with a minimum investment of $2,500. I will have incentive to read the prospectus and the semi-annual and annual reports. I will have something to watch to see how it performs under different market conditions. See if the fund will do what it says or just be a drag on performance.

I have a brokerage IRA through this same company and might be able to purchase QSPIX. My independent broker has the same trading platform and he might be able to get it for me. I might do some asking around. My broker doesn't believe in this stuff and I am sure he would discourage me a bit.

So I might buy QSPIX or a similar fund. Or I might try getting factor exposure with the factor ETFs. The reason that I have been able to talk intelligently about a lot of topics is that I have actually done a lot of things as an investor. I can speak from experience. Maybe I need to dip my toe in here to get additional investor experience. Otherwise, I am arguing from partial ignorance. I am thinking about this.
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Re: QSPIX - thoughts on interesting fund

Postby packer16 » Thu Jun 18, 2015 9:38 pm

I draw my circle of competence at where I have implemented and seen an investment strategy work. I expect SCV to have a pretty good expected return (market return plus 3% (it has a +7% return since 2000) and maybe an additional 5 to 10% if practiced on a concentrated basis) based upon history of above average returns over a number of cycles and my own returns with a more concentrated portfolio. As to the expected returns of the other factors I have no idea of what the expected return is so I do not invest in them. I think you have to have at least some notion of this to invest in these, otherwise how would you know how to weight them or what type of leverage to apply. I know the many details I have to deal with to implement just one factor (value) successfully (I don't want to be the patsy), I cannot imagine trying to master 10 from a long and short perspective.

I think LTCM is relevant as they thought they had identified inefficiencies and leveraged up to increase returns to an acceptable level. Here the leverage is not as great but the underlying concept of having to lever returns to make an adequate return is. I also wonder if for some of these factors how deep the markets are some of the underlying securities are. It is one thing if you are long and have a long enough time horizon to ride out the storm but if you are levered or short you may be called at not have the option to ride out the storm.

Do you know if these guys have a tracking mechanism to track the actual amount of tracking error to their intended exposure? If not, how do you know you are getting in practice what your data is showing. We typically see a slippage of performance between a theoretical model performance and an actual portfolio.

Bonds have a purpose of lowering portfolio volatility in a known and expected way. You mix the bonds with the stocks to your risk level. Alternatives, like this fund, could lower volatility but not a way that is as direct as bonds.

As this being a supplement, I think finding some undervalued stocks and purchasing them would be cheaper, more understandable and have higher expected returns than this fund. There are other sources of return (beyond stocks and bonds) but unless you know how much their expected return is how do you determine if it makes sense to invest in that factor?

The fees are another big issue for me. I am reluctant to pay 1% for a known strategy with a skilled implementer (Sequoia) so why should I pay 1.5% to strategy that is not totally known and the implementer who has a short track record with this strategy and had a blow up in one of his funds (AQR Absolute Return) in the last crisis, as described below:

http://www.wsj.com/articles/SB124303417991748685.

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Re: QSPIX - thoughts on interesting fund

Postby lack_ey » Thu Jun 18, 2015 10:45 pm

packer16 wrote:I draw my circle of competence at where I have implemented and seen an investment strategy work. I expect SCV to have a pretty good expected return (market return plus 3% (it has a +7% return since 2000) and maybe an additional 5 to 10% if practiced on a concentrated basis) based upon history of above average returns over a number of cycles and my own returns with a more concentrated portfolio. As to the expected returns of the other factors I have no idea of what the expected return is so I do not invest in them. I think you have to have at least some notion of this to invest in these, otherwise how would you know how to weight them or what type of leverage to apply. I know the many details I have to deal with to implement just one factor (value) successfully (I don't want to be the patsy), I cannot imagine trying to master 10 from a long and short perspective.

Nobody knows what the correct weightings are in advance, just like nobody actually knows what to expect of SCV in the future. There are some ideas, but nothing definite. That said, a lot of the substrategies go many, many years back, so this is not a matter of some kind of newfangled idea with only a couple years and a 23-year backtest to its name. If you want to look at real-world implementations of say momentum trading across asset classes, there are decades of managed futures / commodity trading advisor results (though a bit spotty with reporting, probably) to look at. Currency carry trade has been around for a while. It goes on. Again, not everything has to be understood or even work for the whole to be functional and worthwhile.

packer16 wrote:I think LTCM is relevant as they thought they had identified inefficiencies and leveraged up to increase returns to an acceptable level. Here the leverage is not as great but the underlying concept of having to lever returns to make an adequate return is. I also wonder if for some of these factors how deep the markets are some of the underlying securities are. It is one thing if you are long and have a long enough time horizon to ride out the storm but if you are levered or short you may be called at not have the option to ride out the storm.

LTCM's "acceptable level" for returns was a whole lot higher, if that's the way you want to put it. Again, there's the low-volatility version of the style premia fund with lower leverage and a lower ER (0.85%) that might have returns (if things go as planned, if things overall work) closer to bonds than stocks.

Stocks are inherently leveraged on the inside. People purchase homes with leverage. At reasonable levels, leverage shouldn't be considered anathema, just another source of risk and danger. There just may or may not be too much of it here in conjunction with the underlying assets.

Have you looked at what the underlying securities are? They exclude small cap stocks, less traded currencies, and on and on just to make sure the strategy is feasible and at relatively low transaction costs. The capacity of a strategy is a concern addressed in some of the documentation somewhere—it's up to us to judge if they've paid enough attention to it.

packer16 wrote:Do you know if these guys have a tracking mechanism to track the actual amount of tracking error to their intended exposure? If not, how do you know you are getting in practice what your data is showing. We typically see a slippage of performance between a theoretical model performance and an actual portfolio.

They have papers discussing the impacts of trading and realizing the underlying properties. Maybe they don't have such a tracking mechanism, but that seems a bit far-fetched. Anyhow, the simulated return using the most basic definitions of the styles (e.g. only using price/book for value in equities) over the 23-year period is 17.4% annualized over the risk-free rate with 10% standard deviation. If someone is quoting a 7% expected return, they are baking in a lot of slippage and transaction costs into the number—as it should be. Everyone is concerned about slippage, both from execution and factors not working as well as they did in the past. We're just talking matters of degree. Too much and it loses money in the long term, and that's no fun. Somewhat more than expected and it still may be worthwhile, just not as good as people thought.

packer16 wrote:Bonds have a purpose of lowering portfolio volatility in a known and expected way. You mix the bonds with the stocks to your risk level. Alternatives, like this fund, could lower volatility but not a way that is as direct as bonds.

This goes all the way back to fundamental ideas and intuitions from MPT (straight application of MPT being fraught with challenges). A different, less correlated source of return is usually better than more of what you already have. The risk is just diversifying into assets that offer too little return and too much volatility, thus dragging the portfolio away from the (so-called) efficient frontier. That's the main concern for commodities, for example. Here you have (probably?) higher return and (probably?) lower volatility than that in a package that is at least better defined than most, and so Larry Swedroe called it an alternative to alternatives. Now, unlike commodities you don't get inflation shock protection or have the same economic rationales, but you can't have everything. An investor might well have a variety of alternatives including this one. For better or worse, a lot of institutional portfolios are full of the stuff, from private equity to hedge funds to timber and who knows what else.

packer16 wrote:As this being a supplement, I think finding some undervalued stocks and purchasing them would be cheaper, more understandable and have higher expected returns than this fund. There are other sources of return (beyond stocks and bonds) but unless you know how much their expected return is how do you determine if it makes sense to invest in that factor?

You guess and estimate, just like with everything else. There's just more guessing to go around here. Again, any idea of "optimization" in the markets is flimsy so rough ideas are as best as we've got anyway.

packer16 wrote:The fees are another big issue for me. I am reluctant to pay 1% for a known strategy with a skilled implementer (Sequoia) so why should I pay 1.5% to strategy that is not totally known and the implementer who has a short track record with this strategy and had a blow up in one of his funds (AQR Absolute Return) in the last crisis, as described below:

http://www.wsj.com/articles/SB124303417991748685.

The fees should be a big issue to everyone, and the not-small transaction costs on top of that. The implementer here doesn't have that long a track record with the exact strategy, but I don't think there's much of a case to be made (for example) that experience trading futures and managing target volatilities to gain exposure to one factor doesn't carry over to trading futures to gain exposure to another factor. As noted above, the ER is lower if you go for the low-volatility version.

As discussed previously, the targeted return and volatility for Absolute Return are higher, and presumably it is taking more risk or using more leverage. I don't exactly have docs on that and am ready to be proven wrong by anybody who knows more about it. But it's hard to call it a "blow up" seeing as the incident didn't shutter the fund and annualized returns over a sixteen-year period including that "blow up" period were 10.8% after fees compared with the S&P 500's 6.8% and small-cap value around 9% (okay, different depending on the loadings).

In any case, those especially wary of the shorting, leverage, and non-equity strategies are probably much better off in one of those significantly cheaper multifactor equity funds out there these days. This may or may not be better in the long run.

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Re: QSPIX - thoughts on interesting fund

Postby matjen » Fri Jun 19, 2015 9:30 am

lack_ey wrote:
packer16 wrote:The fees are another big issue for me. I am reluctant to pay 1% for a known strategy with a skilled implementer (Sequoia) so why should I pay 1.5% to strategy that is not totally known and the implementer who has a short track record with this strategy and had a blow up in one of his funds (AQR Absolute Return) in the last crisis, as described below:

http://www.wsj.com/articles/SB124303417991748685.

The fees should be a big issue to everyone, and the not-small transaction costs on top of that. The implementer here doesn't have that long a track record with the exact strategy, but I don't think there's much of a case to be made (for example) that experience trading futures and managing target volatilities to gain exposure to one factor doesn't carry over to trading futures to gain exposure to another factor. As noted above, the ER is lower if you go for the low-volatility version.

As discussed previously, the targeted return and volatility for Absolute Return are higher, and presumably it is taking more risk or using more leverage. I don't exactly have docs on that and am ready to be proven wrong by anybody who knows more about it. But it's hard to call it a "blow up" seeing as the incident didn't shutter the fund and annualized returns over a sixteen-year period including that "blow up" period were 10.8% after fees compared with the S&P 500's 6.8% and small-cap value around 9% (okay, different depending on the loadings).

In any case, those especially wary of the shorting, leverage, and non-equity strategies are probably much better off in one of those significantly cheaper multifactor equity funds out there these days. This may or may not be better in the long run.


Packer16, why didn't you pick Bill Miller's fund? I think you would have in 2006...

It seems to me that comparing another fund run by AQR to about the best mutual fund after-the-fact isn't a very convincing argument to not invest in a third fund that has a different strategy.
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"The Problem With Alternative Investing"

Postby Taylor Larimore » Fri Jun 19, 2015 9:38 am

Bogleheads:

Morningstar posted this analysis of Alternative Investments including long-short funds:

The Problem With Alternative Investing

Best wishes
Taylor
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Re: QSPIX - thoughts on interesting fund

Postby packer16 » Fri Jun 19, 2015 9:56 am

matjen wrote:
lack_ey wrote:
packer16 wrote:The fees are another big issue for me. I am reluctant to pay 1% for a known strategy with a skilled implementer (Sequoia) so why should I pay 1.5% to strategy that is not totally known and the implementer who has a short track record with this strategy and had a blow up in one of his funds (AQR Absolute Return) in the last crisis, as described below:

http://www.wsj.com/articles/SB124303417991748685.

The fees should be a big issue to everyone, and the not-small transaction costs on top of that. The implementer here doesn't have that long a track record with the exact strategy, but I don't think there's much of a case to be made (for example) that experience trading futures and managing target volatilities to gain exposure to one factor doesn't carry over to trading futures to gain exposure to another factor. As noted above, the ER is lower if you go for the low-volatility version.

As discussed previously, the targeted return and volatility for Absolute Return are higher, and presumably it is taking more risk or using more leverage. I don't exactly have docs on that and am ready to be proven wrong by anybody who knows more about it. But it's hard to call it a "blow up" seeing as the incident didn't shutter the fund and annualized returns over a sixteen-year period including that "blow up" period were 10.8% after fees compared with the S&P 500's 6.8% and small-cap value around 9% (okay, different depending on the loadings).

In any case, those especially wary of the shorting, leverage, and non-equity strategies are probably much better off in one of those significantly cheaper multifactor equity funds out there these days. This may or may not be better in the long run.


Packer16, why didn't you pick Bill Miller's fund? I think you would have in 2006...

It seems to me that comparing another fund run by AQR to about the best mutual fund after-the-fact isn't a very convincing argument to not invest in a third fund that has a different strategy.


Sequoia was not chosen after the fact, I have held this fund for awhile and their strategy is understandable (focus on high quality firms selling at reasonable prices that can compound over time) vs. QSPIX which IMO is not. They also focus on one or possibly two factors (value and profitability) and only do long investing. This to me is much more achievable than understanding and mastering 10 strategies both long and short. Given the WSJ article, I would be cautious about anther blow-up (a decline of 45% is blow-up in my book and not much of a diversifier from equities happening at the same time) that I am sure was not anticipated by AQR last time. What is different this time?

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Re: QSPIX - thoughts on interesting fund

Postby lack_ey » Fri Jun 19, 2015 10:14 am

packer16 wrote:Sequoia was not chosen after the fact, I have held this fund for awhile and their strategy is understandable (focus on high quality firms selling at reasonable prices that can compound over time) vs. QSPIX which IMO is not. They also focus on one or possibly two factors (value and profitability) and only do long investing. This to me is much more achievable than understanding and mastering 10 strategies both long and short. Given the WSJ article, I would be cautious about anther blow-up (a decline of 45% is blow-up in my book and not much of a diversifier from equities happening at the same time) that I am sure was not anticipated by AQR last time. What is different this time?

Packer

The underlying investment strategies and amount of risk taken are different. You may or may not believe in the robustness of the investment strategies, but the lower leverage and risk targeting are likely to reduce the downside compared to something that aggressive. Something with more pieces is less likely to see big failures. (i.e. most or all of them go bad simultaneously)

As I've said from the start, one should always assume that quant models will be wrong in some form and that there will be periods where something that's not "supposed" to happen does happen. Nothing about 4x long / 4x short (even if using a lot of that to leverage bonds) and with this kind of construction should be considered a safe haven asset. That's not the role.

Taylor Larimore wrote:Bogleheads:

Morningstar posted this analysis of Alternative Investments including long-short funds:

The Problem With Alternative Investing

Best wishes
Taylor

Interestingly enough, the author recommends buying and holding multialternatives, baking in multiple strategies into one fund. AQR's style premia fund is one of the preeminent multialternative funds in the space. Of course, if you want more muted and boring returns as suggested, you'd want to go with the low volatility version.

But even for these, I think the underlying warning about performance chasing and going in and out of funds is relevant. A fundamental problem is investor confidence in the strategy being used. The better you understand where the returns are coming from and why, the more likely you'll stick with it. This is why I keep asking people to analyze all the constituent strategies and tell me what they think the returns should be and why. You need to do a lot of due diligence before even thinking about a fund like this. On the other hand, if the world changes enough, maybe there's no more money to be made, and it might actually be a good idea to bail eventually. This is the very tough part about investing in alts and why most people should stay away and stick to what more clearly works.

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Re: QSPIX - thoughts on interesting fund

Postby Robert T » Fri Jun 19, 2015 10:27 am

.
Another relevant paper by Fama-French

http://www.chicagobooth.edu/news/pdf/Ti ... 200605.pdf

Robert
.

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Re: QSPIX - thoughts on interesting fund

Postby matjen » Fri Jun 19, 2015 10:56 am

Robert T wrote:.
Another relevant paper by Fama-French

http://www.chicagobooth.edu/news/pdf/Ti ... 200605.pdf

Robert
.


Great article and contribution Robert T. Without getting too far over my skis I would say the key sentence is "The simple answer, developed in more detail below, is that mutual funds are a more flexible and lower-cost medium for obtaining the tilts than hedge funds, at least as typically constructed." I think we can all agree that QSPIX isn't constructed like their example and my initial thoughts are that it is spread across much more than just equities and uses a variety of strategies so these differing elements "should" reduce tail risk. In Ilmanen's presentations he shows how the fund is diversified within itself if that makes sense.
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Re: QSPIX - thoughts on interesting fund

Postby grap0013 » Fri Jun 19, 2015 3:12 pm

Robert T wrote:.
Another relevant paper by Fama-French

http://www.chicagobooth.edu/news/pdf/Ti ... 200605.pdf

Robert
.


Hmmm....I don't know what to make of your stance here Robert. Judging by your previous posts, I think you are intrigued by QSPIX but this paper seems to say stay away from hedging and leverage. Although the paper and QSPIX is not an apples to apples comparison. QSPIX is a beast of another nature. Robert, are you trying to say "use caution with QSPIX" with the above link?

I think it is much more likely that beta (single premium) gets hammered than all of QSPIX's multiple premiums getting hammered simultaneously. QSPIX all boils down to transaction fees and execution on top of a high ER.
There are no guarantees, only probabilities.

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Robert T
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Re: QSPIX - thoughts on interesting fund

Postby Robert T » Fri Jun 19, 2015 4:06 pm

matjen wrote:Great article and contribution Robert T. Without getting too far over my skis I would say the key sentence is "The simple answer, developed in more detail below, is that mutual funds are a more flexible and lower-cost medium for obtaining the tilts than hedge funds, at least as typically constructed." I think we can all agree that QSPIX isn't constructed like their example and my initial thoughts are that it is spread across much more than just equities and uses a variety of strategies so these differing elements "should" reduce tail risk. In Ilmanen's presentations he shows how the fund is diversified within itself if that makes sense.

I agree that its not an exact/equivalent comparison, but it highlights some interesting points - such as cost and leverage.

The equity premium has historically been the largest of all premiums and its also the cheapest. For 0.05% you can buy 100% of the equity premium + T-bills (Rf). Its not possible to buy 100% of the value (HML), momentum (UMD), and quality (QMJ) premiums - which have historically been smaller than the equity premium (Mkt-Rf) + T-bills for anywhere close to 0.05%.

However you can leverage up the returns of equities by adding a portion of SMB, HML, UMD, and QMJ through long-only funds for a small incremental cost (0.08 to 0.15 total expenses ratio for cheap options), however its only possible to add a lot of one or two (e.g. SMB and HML) or small amounts of three or four through long only options.

The question is how much do we value diversification (of equity factors)? Some say US treasuries provide the greatest diversification for an equity portfolio (e.g. Swensen). You can buy Treasuries directly for little/no cost or through an ETF for about 0.15% expense ratio. International stocks, over the long-term, also potentially provide diversification benefits which again can be purchased relatively cheaply.

How much incremental benefit will there be to adding more equity factors through a fund like QSPIX for 1.5% per year? This is the question we all need to answer - and answers differ by individuals as perceived benefits differ - and that's okay.

The costs are guaranteed, the returns are not. I think the long-only options are much clearer to assess (low cost factor tilts, international diversification, with US treasuries), than a fund like QSPIX. As we don't have the historical simulated data we don't know the historical factor loads (as a possible reflection of future characteristics) of the fund and the implications for portfolio inclusion. It will not add 100% of all four premia it targets (as these would sum to a much larger number than the 7% expected return suggested by others), but will add a share of the four, more so than long-only options (we don't know how much), but without exposure to the equity premium. As indicated earlier, IMO the diversification benefits of adding QSPIX would perhaps be greatest for (i) an all equity long-only, fully tilted portfolio (lower opportunity cost of reducing beta relative to adding bonds, although I think adding explicit leverage though QSPIX increases rather than reduces tails risk [extreme outliers on the downside], especially relative to adding bonds), , and (ii) to an equity portfolio with no other long-only options to tilt (if that is what you are targeting).

The case is much less clear cut for other portfolios as adding this fund seems to focus more on 'shallow risk' diversification than 'deep risk' diversification to use Bernstein's terminology (at least in accumulation phase). The main diversification being in periods of inflationary recessions when neither stocks nor bonds perform particularly well (re. Illmanen et al article in JPM on Macroeconomic sensitivities: How investments respond to difference economic environments).

Robert
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Last edited by Robert T on Fri Jun 19, 2015 4:34 pm, edited 2 times in total.

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matjen
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Re: QSPIX - thoughts on interesting fund

Postby matjen » Fri Jun 19, 2015 4:32 pm

Robert T wrote: The main diversification being in periods of inflationary recessions when neither stocks nor bonds perform particularly well (re. Illmanen et al article in JPM on Macroeconomic sensitivities: How investments respond to difference economic environments).

Robert
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I pulled this last sentence out because it is one of the drivers for my decision to allocate 4-5% to QSPIX. As always, I examine things at a more basic level than you but whether or not we will have or are in an inflationary recession, the expected returns for both equities and bonds are pretty poor. Both being quite expensive which is unusual. Hence QSPIX is more appealing to me.

It is also entertaining. What would I do with my time if I didn't have this thread? :happy
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