QSPIX - thoughts on interesting fund

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Maynard F. Speer
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Re: QSPIX - thoughts on interesting fund

Post by Maynard F. Speer » Sun Jun 07, 2015 2:40 pm

lack_ey wrote:Well, here they only have four strategies. That's probably safer than only having one or two. Their data and research and that in the literature at large on value and momentum go for many many more decades, which is no guarantee of anything but certainly better than two-and-a-half decades. There's less data for which to look at some of the others and across non-equity asset classes.

Like I said earlier, if everything goes roughly as they expect, this is a very good investment despite the high fees. But I would characterize "mathematical anomalies" as more of "managers don't know as much as they hope they know about the world because best models necessarily based on past history are often way wrong at times." The expectation should be more that these things should happen rather than that they won't.


I've not looked at AQR's in detail, but it seems GARS-like - and GARS has had a huge impact on UK investors .. It's only been open to public investment since around 2007/08, but it's been run in a different incarnation for institutional investors for longer (it runs with a sub-0.9% fee)

You can see what looks like a very complex portfolio - I'd argue it's actually lots of very simple portfolios (nothing a layman who reads the FT couldn't implement) .. I'd also argue it would take market conditions far stranger than a repeat of 2008, or huge liquidity crisis in bonds, to see significant losses from a fund like this

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Re: QSPIX - thoughts on interesting fund

Post by lack_ey » Sun Jun 07, 2015 2:55 pm

pkcrafter wrote:Vote - Does AQR style investing, considering cost, qualify as a Boglehead strategy?

If it actually does produce higher risk-adjusted returns other managers will use it. It will become popular and then the norm. From there the market will incorporate it and Vanguard will provide a low cost index fund. I'll wait. :D

Paul

I don't know if you were serious about that or not, but I'm not convinced an index is a great way to go for tilted, never mind somewhat actively trading long-short strategies. If you're going to tilt away from the broad market, better follow a procedure others aren't and not be trying to furiously play catch-up to the index. Also, there is maybe the hope of being able to incorporate new information about how something works. And you may as well set up screens for inclusion, as DFA does, and as even the index providers do to a lesser extent. It's just the cost of non-index funds that's the problem.

By the way, Vanguard's alternative strategies fund seems to be launching/has launched. It should be long-short equities, currencies, commodities, bond futures, and more, with an ER of 1.1%.
http://investorplace.com/2015/05/vangua ... gies-fund/
https://pressroom.vanguard.com/content/ ... .2015.html

That said, I don't really see mention of it anywhere.

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Re: QSPIX - thoughts on interesting fund

Post by longinvest » Sun Jun 07, 2015 3:06 pm

pkcrafter wrote:Vote - Does AQR style investing, considering cost, qualify as a Boglehead strategy?

No, it doesn't.

Mr. Bogle (you know, the Bogle in Bogleheads) does not advocate the use of such active funds. On the contrary, he promotes the use of low-cost index funds. He even devised a Cost Matters Hypothesis (CMH) theory:
Mr. Bogle wrote:But the EMH may well prove less important in investment theory than a new wisdom that is beginning to emerge. I call it the CMH: The Cost Matters Hypothesis. Like the EMH before it, the CMH posits a conclusion that is both trivially obvious and remarkably sweeping: The mathematical expectation of the speculator is a loss equal to the amount of transaction costs incurred. When he concluded otherwise, that “the mathematical expectation of the speculator is zero,” Bachelier was wrong.
Last edited by longinvest on Sun Jun 07, 2015 3:20 pm, edited 1 time in total.
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Re: QSPIX - thoughts on interesting fund

Post by robert88 » Sun Jun 07, 2015 3:07 pm

Maynard F. Speer wrote:... and these were about the only investments that made positive returns through 2008-09


The record of hedge funds in the financial crisis was more complex if you look over a longer period.

http://web.mit.edu/alo/www/Papers/august07.pdf

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Re: QSPIX - thoughts on interesting fund

Post by randomguy » Sun Jun 07, 2015 3:15 pm

Ketawa wrote:There are already some index funds using strategies similar to AQR's. MSCI has some multi factor indexes and I believe there are some iShares ETFs already following them. I have stuck with AQR's funds. I hold the domestic small cap, international developed, and emerging markets multi-style funds.

I doubt you could replicate QSPIX's strategy using an index fund.


Those factor indexes can get you value, momentum and size. They are not going to give you any of the currency hedging and the like that AQR is doing.

Personally I view this holding as a hedge. Some people like Gold or commodities. I like my odds with fund. And of course some people say screw it, I will gamble 1961-1981 will not happen again and I will be happy with US only stocks and bonds. Odds are it will not make a difference over the long run. Do what helps you sleep at night

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Re: QSPIX - thoughts on interesting fund

Post by backpacker » Sun Jun 07, 2015 3:34 pm

Let's try a simple exercise. Can anyone who thinks that QSPIX makes sense as an investment answer the following questions:

(1) QSPIX invests in interest rate futures. What specific screening criteria does QSPIX use to determine which interest rate futures contracts to buy? Why do those criteria make sense?

(2) How does QSPIX employ leverage in its currency futures position?

(3) If you can't answer either of the above, why would you invest in this fund?

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Re: QSPIX - thoughts on interesting fund

Post by lack_ey » Sun Jun 07, 2015 3:44 pm

backpacker wrote:Let's try a simple exercise. Can anyone who thinks that QSPIX makes sense as an investment answer the following questions:

(1) QSPIX invests in interest rate futures. What specific screening criteria does QSPIX use to determine which interest rate futures contracts to buy? Why do those criteria make sense?

(2) How does QSPIX employ leverage in its currency futures position?

(3) If you can't answer either of the above, why would you invest in this fund?

Lemme see. I don't own this stuff myself but I'll claim to know a little about it. I would do due diligence and read a lot more of the literature before investing in anything this complicated.

(1) Okay, let's go through the categories on the long side. For value, I think they're probably looking at whatever has high real yield. For momentum, whatever has been increasing in price in the last X months (momentum is pretty clear to implement in any asset class). For carry, whatever has a high yield relative to short-term rates (this is something akin to banking, i.e. borrow short, invest long). For defensive... hm. I'm not sure what would count as low beta for bonds.Maybe they skip this for bonds? Or maybe it has to deal with country debt-to-GDP or credit rating or something else? I would have to cheat and go look. [edit: on second thought, if this is defensive in the low beta sense, then maybe it's whatever bonds have had low beta relative to global bonds as the benchmark, so the ones less sensitive to interest rate movements globally. that would be simple enough and seems to fit] On the short side, the opposite of all the above.

edit: I see I completely misread and you said "interest rate futures" and not "bond futures." Dunno how that happened. Usually this should mean the shorter end of the yield curve when you're making a distinction from bond futures. Regardless, for value it's the same thing as for bond futures, just on the shorter part of the yield curve. For momentum, the same thing. Carry would be the roll yield down the short-term part of the yield curve. I have no idea what the defensive would be in interest rate futures. Maybe nothing, or the same thing I said for bonds.

These styles have worked more often than not in multiple asset classes, though I don't know if they always work in fixed income and interest rates.

(2) Just by nature of using futures. The amount of initial and maintenance margin on a currency future is way less than the currency amount that is under contract, so there is a lot of leverage possible.
Last edited by lack_ey on Sun Jun 07, 2015 11:22 pm, edited 1 time in total.

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Maynard F. Speer
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Re: QSPIX - thoughts on interesting fund

Post by Maynard F. Speer » Sun Jun 07, 2015 4:19 pm

robert88 wrote:
Maynard F. Speer wrote:... and these were about the only investments that made positive returns through 2008-09


The record of hedge funds in the financial crisis was more complex if you look over a longer period.

http://web.mit.edu/alo/www/Papers/august07.pdf


Well there's a far too much that can go wrong with long/short equity funds .. I used to hold two, both of which performed well, but they really are a bit of a high-wire act

My strategy for high returns is to buy what other people won't touch and hold forever .. For stable returns it's to find funds that could be run reasonably well by 100 trained monkeys .. I think they're both very similar approaches
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Re: QSPIX - thoughts on interesting fund

Post by pkcrafter » Sun Jun 07, 2015 4:39 pm

Ketawa wrote:
There are already some index funds using strategies similar to AQR's. MSCI has some multi factor indexes and I believe there are some iShares ETFs already following them.

Yes, and total stock market is a multi factor fund as well. :wink:

cheers all,

Paul
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Re: QSPIX - thoughts on interesting fund

Post by rrppve » Sun Jun 07, 2015 4:44 pm

pkcrafter wrote:Ketawa wrote:
There are already some index funds using strategies similar to AQR's. MSCI has some multi factor indexes and I believe there are some iShares ETFs already following them.

Yes, and total stock market is a multi factor fund as well. :wink:

cheers all,

Paul

Both with Beta=1
Tough to get Beta=0 without going to the short side like QSPIX.
Lots of the academic research on factors was done using long short portfolios to determine factor returns. Remember the m in XmX, substitute your favorite factor, stands for minus. There is a real diversification benefit from adding this type of hedge to a portfolio.

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Re: QSPIX - thoughts on interesting fund

Post by DaufuskieNate » Sun Jun 07, 2015 5:03 pm

pkcrafter wrote:Yes, and total stock market is a multi factor fund as well. :wink:
Paul


Actually, its a mono-factor fund. Beta.

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Re: QSPIX - thoughts on interesting fund

Post by Maynard F. Speer » Sun Jun 07, 2015 6:27 pm

Of course .. a truly passive investor would have to hold about 10% in alternatives :beer

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Re: QSPIX - thoughts on interesting fund

Post by nisiprius » Sun Jun 07, 2015 6:43 pm

Maynard F. Speer wrote:...Well there's a far too much that can go wrong with long/short equity funds .. I used to hold two, both of which performed well, but they really are a bit of a high-wire act...
Remember the 130/30 funds? The whole world seemed to be touting them around 2007. Finally, mutual would be able to unleash the full stock-picking powers of their managers and we would see how much alpha they could generate once they were freed from the suffocating corsets of restriction to long-only positions. They were going to reach $2 trillion in assets very soon, and all but supersede traditional long-only funds as core investment vehicles for 401(k) savers.

I'd love to do my usual Morningstar-chart-thing but 130/30 funds were such an unmitigated disaster that almost all of them succumbed... so even if one could find a 130/30 fund that hadn't morphed into something else, it would be nothing but an exercise in survivorship bias.
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Re: QSPIX - thoughts on interesting fund

Post by Yesterdaysnews » Sun Jun 07, 2015 6:55 pm

AQR has some very interesting offerings, but seems they have use for the individual investors taxable account money for some reason. $5 M minimum for a momentum fund? Seems they all have 5M minimum for individual investors taxable accounts. Guess I will limit my investments to my Fido IRA as there is no choice essentially.

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Re: QSPIX - thoughts on interesting fund

Post by lack_ey » Sun Jun 07, 2015 7:07 pm

nisiprius wrote:
Maynard F. Speer wrote:...Well there's a far too much that can go wrong with long/short equity funds .. I used to hold two, both of which performed well, but they really are a bit of a high-wire act...
Remember the 130/30 funds? The whole world seemed to be touting them around 2007. Finally, mutual would be able to unleash the full stock-picking powers of their managers and we would see how much alpha they could generate once they were freed from the suffocating corsets of restriction to long-only positions. They were going to reach $2 trillion in assets very soon, and all but supersede traditional long-only funds as core investment vehicles for 401(k) savers.

I'd love to do my usual Morningstar-chart-thing but 130/30 funds were such an unmitigated disaster that almost all of them succumbed... so even if one could find a 130/30 fund that hadn't morphed into something else, it would be nothing but an exercise in survivorship bias.

There's at least one ETF based on a 130/30 index (fundamentally weighted, not cap weighted).

Despite higher expenses this ProShares large cap 130/30 ETF (CSM) has edged out the S&P 500 barely:
http://quotes.morningstar.com/chart/fun ... A%5B%5D%7D

It should be noted that net exposure has more mid caps than the S&P 500, which as we know outperformed large caps over the period. That difference in performance is pretty tame, including in 2011. Last 5 years shows a beta of 1.04 to the S&P 500 and R^2 of 98.25. Was the brunt of 2008-2009 that different for the strategy? (I could believe it.) Or did active managers just blow themselves up with the wrong bets?

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Re: QSPIX - thoughts on interesting fund

Post by DaufuskieNate » Sun Jun 07, 2015 7:08 pm

This fund may prove to be an inexpensive way to gain multi-factor exposure. Long and short positions each represent over 300% of the net assets of the fund (this is the leverage). This creates a very concentrated position in several factors. But since it's long/short market neutral it has no meaningful beta exposure. Beta exposure is cheap to buy (VTSAX at 5 bp). A simple example would be to combine a 10-20% position in QSPIX with 80-90% VTSAX in the equity portion of a portfolio. This combination provides a meaningful multi-factor tilt for 20-34bp all-in. Not bad when compared to many of the alternatives to achieve this kind of tilt.

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"You shouldn't buy anything too complex to explain . ."

Post by Taylor Larimore » Sun Jun 07, 2015 7:09 pm

Bogleheads:

Jane Bryant Quinn is a respected author and columnist. In Making the Most of Your Money she wrote:
You shouldn't buy anything too complex to explain to the average 12 year-old.

It is one of the quotes in my link below.

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

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Re: "You shouldn't buy anything too complex to explain . ."

Post by randomguy » Sun Jun 07, 2015 8:48 pm

Taylor Larimore wrote:Bogleheads:

Jane Bryant Quinn is a respected author and columnist. In Making the Most of Your Money she wrote:
You shouldn't buy anything too complex to explain to the average 12 year-old.

It is one of the quotes in my link below.

Best wishes.
Taylor


Have you ever tried explaining how a cap weighted index fund works to a 12 year old?:)

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Re: "You shouldn't buy anything too complex to explain . ."

Post by Taylor Larimore » Sun Jun 07, 2015 9:37 pm

randomguy wrote:
Taylor Larimore wrote:Bogleheads:

Jane Bryant Quinn is a respected author and columnist. In Making the Most of Your Money she wrote:
You shouldn't buy anything too complex to explain to the average 12 year-old.

It is one of the quotes in my link below.

Best wishes.
Taylor


Have you ever tried explaining how a cap weighted index fund works to a 12 year old?:)

randomguy:

Easy. Tell the 12 year old that her Total Market Index Fund makes her a part owner of nearly every U.S. corporation.

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

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Re: QSPIX - thoughts on interesting fund

Post by Ketawa » Sun Jun 07, 2015 10:55 pm

backpacker wrote:Let's try a simple exercise. Can anyone who thinks that QSPIX makes sense as an investment answer the following questions:

(1) QSPIX invests in interest rate futures. What specific screening criteria does QSPIX use to determine which interest rate futures contracts to buy? Why do those criteria make sense?

(2) How does QSPIX employ leverage in its currency futures position?

(3) If you can't answer either of the above, why would you invest in this fund?


These questions are a little confusing. By the way you're asking, I think you're trying to get respondents to explain the carry trade. But I'm not sure. You start with bonds, then shift to currencies. I halfway think that you don't know what you're asking.

But regardless, AQR implements value, momentum, carry, and defensive strategies for bonds. For currencies, AQR implements value, momentum, and carry strategies. I don't pretend to know the secret sauce to screen assets, and I don't particularly care if I do. All four strategies (value, momentum, carry, defensive) are well documented. Value, momentum, and carry have been known about for decades.

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Re: QSPIX - thoughts on interesting fund

Post by Maynard F. Speer » Mon Jun 08, 2015 12:44 am

nisiprius wrote:Remember the 130/30 funds? The whole world seemed to be touting them around 2007. Finally, mutual would be able to unleash the full stock-picking powers of their managers and we would see how much alpha they could generate once they were freed from the suffocating corsets of restriction to long-only positions. They were going to reach $2 trillion in assets very soon, and all but supersede traditional long-only funds as core investment vehicles for 401(k) savers.

I'd love to do my usual Morningstar-chart-thing but 130/30 funds were such an unmitigated disaster that almost all of them succumbed... so even if one could find a 130/30 fund that hadn't morphed into something else, it would be nothing but an exercise in survivorship bias.


I don't know how they sold that idea to people .. When long/short equities goes wrong it just looks like a car hitting black ice

One hedge fund I own (BlueCrest AllBlue) invests in 7 hard-to-access BlueCrest hedge funds, including one which takes long/short equity positions (the whole fund represents something like 700 staff, three continents and a supercomputer), and as a whole, performance has been extremely consistent .. But looking at almost any of the constituent funds/strategies in isolation, performance is rather chaotic

This chart is why I think (unless you can find the next George Soros) hedge funds really need the 'free lunch' of diversification

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Re: QSPIX - thoughts on interesting fund

Post by countmein » Mon Jun 08, 2015 2:13 am

backpacker wrote:Let's try a simple exercise. Can anyone who thinks that QSPIX makes sense as an investment answer the following questions:

(1) QSPIX invests in interest rate futures. What specific screening criteria does QSPIX use to determine which interest rate futures contracts to buy? Why do those criteria make sense?

(2) How does QSPIX employ leverage in its currency futures position?

(3) If you can't answer either of the above, why would you invest in this fund?



1) You borrow the low yielding currency and invest in the high yielding one.

2) I thought leverage was a built in feature of futures. Otherwise, I don't know. I also don't know how BNDX (VG Intl Bond) employs derivatives in its currency hedging, but that doesn't bother me.

I think you're confusing multitudinousness with complexity. QSPIX is a fund that contains a multitude of mostly simple factor-targeting strategies. I will grant you that there may be an asset class or two in there where it's not immediately obvious how one of the factor strategies would apply. But when you break it down you see that the bulk of QSPIX is equities and we know how factors work there. Then you have the carry trade, we get that. Momentum in any asset is easy to understand (though they do have some black-boxy red-alert algos tacked on to the short side of the carry and momentum, which could either help or hurt, but overall a secondary feature). etc. The strategies are mostly straightforward sounding to me (and well documented), it's just the breadth of asset classes and geographies which are simultaneously overwhelming and also that which makes this fund so awesome.

To Robert's point about uniqueness of exposure-- I have to disagree. Where else are you getting both long and short sides of all four major factors (value, mom, qual, Bab) in high doses, plus a carry trade strategy, plus application in multiple assets-- across the globe. Heck, we're still waiting for a decent ISV fund to come along in ETF land. I can't get momentum without a bunch of negative value tacked on (I'm talking MTUM, the only game in town), nor serious value without a bunch of negative momentum (RPV). The factor exposure situation in long only MFs and ETFs is, beyond DFA, a mess. I love the simplicity of having all the factor exposure you ever wanted wrapped into one fund, designed by competent stewards, for about the same cost per unit exposure as found in DFA funds.

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Re: QSPIX - thoughts on interesting fund

Post by tarheel » Mon Jun 08, 2015 5:50 am

This thread makes me long for the good old days where Larry would hold court. I think he has publicly stated that he holds ~3% QSPIX in his personal portfolio.

Don't know if anyone posted this yet:

http://www.valuewalk.com/2014/11/aqrs-n ... ernatives/

I completely understand how those of us that invest in QSPIX are a minority on a Bogleheads site. I can promise you that those of us in the minority do understand what we are getting into with QSPIX much more than you think we do. If you don't understand it, or won't stay the course with it, don't invest. That simple.

I own many AQR funds (~50% of my portfolio), with the rest Vanguard funds like total bond/total market/total int'l, etc. I have a modest allocation to QSPIX. Guess what my overall portfolio expense ratio is.........0.4%! :wink: I know, not as good as a Vanguard only three funder around 5-10 bps. I'll try better next time.

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Re: "You shouldn't buy anything too complex to explain . ."

Post by randomguy » Mon Jun 08, 2015 6:11 am

Taylor Larimore wrote:
randomguy wrote:
Taylor Larimore wrote:Bogleheads:

Jane Bryant Quinn is a respected author and columnist. In Making the Most of Your Money she wrote:
You shouldn't buy anything too complex to explain to the average 12 year-old.

It is one of the quotes in my link below.

Best wishes.
Taylor


Have you ever tried explaining how a cap weighted index fund works to a 12 year old?:)

randomguy:

Easy. Tell the 12 year old that her Total Market Index Fund makes her a part owner of nearly every U.S. corporation.

Best wishes.
Taylor


At that level I can totally explain QSPIX to a 12 year old also.

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Re: QSPIX - thoughts on interesting fund

Post by packer16 » Mon Jun 08, 2015 6:16 am

All of this sounds good in theory but in practice I think it much more complicated/messy. They have done a great job marketing the end goal without getting into the details of how they will get there and the risks associated with implementing such a strategy. These types of multi-factor approaches have been tried for year in hedge funds and most have not perform as expected but no one has brought up this critical point except Maynard. What makes folks think AQR has come up with a "secret sauce" that these hedge funds who have been doing the for decades have not? Also, if it works what is to prevent the hedge funds from copying thus reducing AQR's edge? (The same questions we would ask any active manager)

The whole factor idea is OK but in looking at what companies qualify as high value there are some obvious errors but unless you know how to value these companies you would not that there is an error. Remember that factors are proxies for an underlying characteristic and not the characteristic itself. That is why these strategies do not concentrate the portfolios on firms with the highest factors. If you step back and look at a good number of these factors, you can directly have exposure to many of them in a concentrated fashion without long/short and leverage (and there associated costs/risks) by performing valuations much the way Graham has described since the 1930's. IMO these guys are not finding something new, they are repackaging what can be found using fundamental analysis using some nice abstractions and charging folks high fees. This is what some hedge funds do and why as many here have said that hedge funds are an expensive waste of time. What surprises me is some if the same folks who think hedge funds are an expensive waste of time somehow think this is different.

For those who understand what they are doing, provide an example with real securities (actual stocks or bonds with tickers) of what they are doing and what has to go right with the security prices for this to work and what the results be if they were wrong along with an assessment of probabilities of being right. (Again these would be questions I would ask any active asset manager).

Packer
Last edited by packer16 on Mon Jun 08, 2015 6:32 am, edited 2 times in total.
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Re: "You shouldn't buy anything too complex to explain . ."

Post by tarheel » Mon Jun 08, 2015 6:18 am

randomguy wrote:
Taylor Larimore wrote:
randomguy wrote:
Taylor Larimore wrote:Bogleheads:

Jane Bryant Quinn is a respected author and columnist. In Making the Most of Your Money she wrote:
You shouldn't buy anything too complex to explain to the average 12 year-old.

It is one of the quotes in my link below.

Best wishes.
Taylor


Have you ever tried explaining how a cap weighted index fund works to a 12 year old?:)

randomguy:

Easy. Tell the 12 year old that her Total Market Index Fund makes her a part owner of nearly every U.S. corporation.

Best wishes.
Taylor


At that level I can totally explain QSPIX to a 12 year old also.


I didn't want to cross that bridge, but I think I easily could as well. :beer

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Re: QSPIX - thoughts on interesting fund

Post by tarheel » Mon Jun 08, 2015 6:23 am

packer16 wrote:All of this sounds good in theory but in practice I think it much more complicated/messy. They have done a great job marketing the end goal without getting into the details of how they will get there and the risks associated with implementing such a strategy. These types of multi-factor approaches have been tries for year in hedge funds and most have not perform as expected but no one has brought up this critical point except Maynard. What makes folks think AQR has come up with a "secret sauce" that these hedge funds who have been doing the for decades have not? Also, if it works what is to prevent the hedge funds from copying this reducing AQR's edge? (The same questions we would ask any active manager)

The whole factor idea is OK but in looking at what companies qualify as high value there are some obvious errors but unless you know how to value these companies you would not that there is an error. Remember that factors are proxies for an underlying characteristic and not the characteristic itself. That is why these strategies do not concentrate the portfolios on firms with the highest factors. If you step back and look at a good number of these factors, you can directly have exposure to many of them in a concentrated fashion without long/short and leverage (and there associated costs/risks) by performing valuations much the way Graham has described since the 1930's. IMO these guys are not finding something new, they are repackaging what can be found using fundamental analysis using some nice abstractions and charging folks high fees. This is what some hedge funds do and why as many here have said that hedge funds are an expensive waste of time. What surprises me is some if the same folks who think hedge funds are an expensive waste of time somehow think this is different.

Packer


Packer - if you want to understand the risks associated with QSPIX, here ya go:

http://hosted.rightprospectus.com/AQRFu ... H420&dt=SP

I'm guessing you'll be posting in the future about how risky the fund is with all of those risks.

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Re: "You shouldn't buy anything too complex to explain . ."

Post by robert88 » Mon Jun 08, 2015 6:45 am

tarheel wrote:I didn't want to cross that bridge, but I think I easily could as well. :beer


You must be talking to some incredibly bright 12 year olds who can explain the carry trade. I'm not sure that I really understand the carry trade.

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Re: QSPIX - thoughts on interesting fund

Post by packer16 » Mon Jun 08, 2015 6:46 am

I have no problem with risk, I just like to understand the risk I am taking so I can position my AA accordingly. IMO this fund has wide range of what the risk could be (similar sub-prime RMBS before the crash) and the returns look to be less than equity so what is the point if owning this versus increasing my equity or SCV exposure if I want to take more risk and being ahead 150bp (or 260bp in real costs) versus buying this? I think the thesis here is these guys have somehow come up with some "secret sauce" that other have not. These guys have to overcome 260bp of fees per year to break-even versus a long only combination of stock and bonds. This is the bet you are making here. If the fees were less it may make sense to take a chance but this IMO has a high probability of lagging index funds.

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Re: QSPIX - thoughts on interesting fund

Post by matjen » Mon Jun 08, 2015 7:30 am

packer16 wrote: These types of multi-factor approaches have been tried for year in hedge funds and most have not perform as expected but no one has brought up this critical point except Maynard. What makes folks think AQR has come up with a "secret sauce" that these hedge funds who have been doing the for decades have not? Also, if it works what is to prevent the hedge funds from copying thus reducing AQR's edge? (The same questions we would ask any active manager)

The whole factor idea is OK but in looking at what companies qualify as high value there are some obvious errors but unless you know how to value these companies you would not that there is an error. Remember that factors are proxies for an underlying characteristic and not the characteristic itself. That is why these strategies do not concentrate the portfolios on firms with the highest factors. If you step back and look at a good number of these factors, you can directly have exposure to many of them in a concentrated fashion without long/short and leverage (and there associated costs/risks) by performing valuations much the way Graham has described since the 1930's. IMO these guys are not finding something new, they are repackaging what can be found using fundamental analysis using some nice abstractions and charging folks high fees. This is what some hedge funds do and why as many here have said that hedge funds are an expensive waste of time. What surprises me is some if the same folks who think hedge funds are an expensive waste of time somehow think this is different.Packer


Was my answer too complicated? Was Maynard's more detailed response as to the differences between this AQR fund and a Hedge Fund?

matjen wrote:
packer16 wrote:The other more important point is that hedge funds don't make sense due in large part due to the fees so why does this fund?
Packer


Simple answer. A Hedge Fund running this type of strategy a few years ago would likely cost 2 and 20. So 200 basis points in management fees and 2000 basis points on any performance. QSPIX is 150 basis points.


Maynard F. Speer wrote:I think many of those who own this fund or similar ones may consider hedge funds and other alternatives too.

But most hedge funds are on a whole different level with respect to potential problems.
1. Usually higher fees — 2&20 and similar arrangements cost a lot more than this does
2. Poor incentives — 2&20 incentivizes risk taking
3. Lack of transparency and protections based on the legal structure
4. Poor liquidity — something of an issue if you want to rebalance, for example
5. Not actually being hedged — on average they have around 0.4 market beta

Not all of these are problems with every hedge fund, but I don't think it's fair to lump in alternatives mutual funds with hedge funds based on just a fees-are-high screen for both.


As to the difference between olds school value picking and AQR/DFA/RAFI, etc. I think you are correct in very general principal. However, there is a difference that is substantial because quants take significantly more of the day-to-day human element out of the process and diversify (usually) over a way larger universe of stocks/securities. Thereby lessening the risk of bad picks. Less concentration is good in my mind.
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Re: "You shouldn't buy anything too complex to explain . ."

Post by matjen » Mon Jun 08, 2015 7:37 am

robert88 wrote:
tarheel wrote:I didn't want to cross that bridge, but I think I easily could as well. :beer


You must be talking to some incredibly bright 12 year olds who can explain the carry trade. I'm not sure that I really understand the carry trade.


I've had my coffee and ready to repeat things from page 1 of this flame war! ;-) Randomguy and tarheel fell for the equity side of the "simple" 3 fund portfolio. How about we talk to 12 year olds about the bond side? This is 25% of Total Bond, do people really understand these instruments? Before 2008-09 I promise you not. Now perhaps some diligent investors but most have no clue IMO.

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Re: "You shouldn't buy anything too complex to explain . ."

Post by randomguy » Mon Jun 08, 2015 7:45 am

robert88 wrote:
tarheel wrote:I didn't want to cross that bridge, but I think I easily could as well. :beer


You must be talking to some incredibly bright 12 year olds who can explain the carry trade. I'm not sure that I really understand the carry trade.


At taylors level you don't have to explain carry trades. It all comes down to how much detail you want. I bet 99% of the people in total market don't understand security lending. Does that mean they shouldn't invest? Of course not. That level of detail isn't important. And yes bonds are even more complicated than stocks.

I think a lot of people miss the point of this fund. It isn't to beat equities or even be drastically less risky. It is to be uncorrelated with stocks while giving similar returns. The questions then are do you see value in that and then do you think aqr can execute.

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Re: QSPIX - thoughts on interesting fund

Post by packer16 » Mon Jun 08, 2015 8:09 am

I think folks can agree the end is good goal but if you how you get there is a black box where you can't specify the conditions of failure and at least have an estimate of failure based upon data then this a "trust" me bet. I have no problem with that if you understand that is what you are getting and paying for. IMO I also so think this a 10 degree of difficulty exercise when you can get the about the same results with a 1 degree of difficulty investment (stock). I my mind how much is additional diversification going to help and do you need it?

If you have set up your AA so you have your needed funds for living in CDs or iBonds the rest available for investment in stocks why do you need additional diversification? and is it worth 260bp to pay someone to get that for you with an uncertain success rate?

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Re: QSPIX - thoughts on interesting fund

Post by backpacker » Mon Jun 08, 2015 9:04 am

Ketawa wrote: But regardless, AQR implements value, momentum, carry, and defensive strategies for bonds. For currencies, AQR implements value, momentum, and carry strategies. I don't pretend to know the secret sauce to screen assets, and I don't particularly care if I do. All four strategies (value, momentum, carry, defensive) are well documented. Value, momentum, and carry have been known about for decades.


If I invest with an active value fund, I in some sense "know" how the manager is using my money. She's buying value stocks! Who cares how she picks which ones? But of course, whether her strategy can be expected to work and whether her fees are sensible depend on the details. Which value strategy is she using? Can it be implemented at a lower cost with other funds? Is the same strategy being used over long periods of time or is it being constantly "tweaked" to improve performance? The AQR fund is in the same boat. They're "doing something involving value, momentum, carry, and defensiveness" in "six asset classes". That's all anyone knows.

Then there's the question of how strategies are combined. DFA's value funds in some sense use value, profitability, and momentum strategies. But value is the main strategy and the others are used as screens.You're getting value stocks with the unprofitable and low momentum stocks screened out. How does the AQR fund work? Is it weighting momentum, value, and defensiveness scores? Is it focusing on "value bond futures" and screening for negative momentum and non-defensive bonds? Is it running different portfolios for each of those factors? No one knows

AQR claims that the fund invests "across six different asset groups: stocks of major developed markets, country indices, bond futures, interest rate futures, currencies and commodities." Are interest rate futures and currencies different strategies? Are they integrated? Is AQR over-counting "assets" because investors like "owning a bunch of stuff" or are they running distinct strategies for all six "groups"?

Maybe I'm overreacting. What I want AQR to do is give me a document describing the basic screens and weightings used to construct the fund, enough that I could at least roughly build the fund from scratch, at least in theory. Their attitude seems to be "We're smart. So just give us your money."

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Re: QSPIX - thoughts on interesting fund

Post by backpacker » Mon Jun 08, 2015 9:23 am

countmein wrote:
backpacker wrote:Let's try a simple exercise. Can anyone who thinks that QSPIX makes sense as an investment answer the following questions[...]

I think you're confusing multitudinousness with complexity. QSPIX is a fund that contains a multitude of mostly simple factor-targeting strategies. I will grant you that there may be an asset class or two in there where it's not immediately obvious how one of the factor strategies would apply. But when you break it down you see that the bulk of QSPIX is equities and we know how factors work there.


Thanks countmein. Even assuming that we do know how the factor strategies work in the case of equities, how does the fund implement all three strategies simultaneously? If you buy, say, only stocks in the top quintile of value, of momentum and of defensiveness, there won't be enough. You'll get fifteen stocks or something. So maybe AQR is running three different portfolios, one for each factor? Or focusing on one factor and using the others as screens? I have no idea what this fund is selling me, even in the case of equities.

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Re: QSPIX - thoughts on interesting fund

Post by matjen » Mon Jun 08, 2015 9:27 am

packer16 wrote:I think folks can agree the end is good goal but if you how you get there is a black box where you can't specify the conditions of failure and at least have an estimate of failure based upon data then this a "trust" me bet. I have no problem with that if you understand that is what you are getting and paying for. IMO I also so think this a 10 degree of difficulty exercise when you can get the about the same results with a 1 degree of difficulty investment (stock). I my mind how much is additional diversification going to help and do you need it?

If you have set up your AA so you have your needed funds for living in CDs or iBonds the rest available for investment in stocks why do you need additional diversification? and is it worth 260bp to pay someone to get that for you with an uncertain success rate?

Packer


packer I would say this whole post is a straw man. No one who owns QSPIX is telling anyone they need it. In fact it is the other way around. As to your 260 bps...I think that is wrong. Larry Swedroe went right to AQR. It is dealt with in detail in this thread.

http://www.bogleheads.org/forum/viewtop ... 0#p2253491

Here's the information I got when I asked AQR

Our expense cap is 150bps. We are required to list dividends on short sale, and acquired fund fees, but do not included them in cap calculation(as explained below). Therefore, we tally up all expenses(excluding dividends on short sale and acquired fund fees) and then waive the necessary amount, in this case 4bps, to get to our 150bps. See below:



Mgmt fee 135bps

+All Other Expense 19bps

=Gross Total 154bps

-Minus Fee Waiver 4bps

=Expense Cap 150bps



Excluded:

1)Dividends on Short Sale(as discussed below)

2)Acquired Fund Fees(required by SEC to be listed). This is the fee associated with cash holdings of fund. However, it is double counting since the NAV we receive is already net of the expense. By listing it, it is double counting, however, we are mandated by the SEC to list it.

Note also that they fully intend to keep the 150bps expense cap in place in perpetuity. The fund ‘s board is required by the SEC to periodically review the funds fees/cap, etc… to ensure they remain suitable, which is why they are required to list an “end date” such as May/2014.

Larry

And..

Just to note, yes a fund must pay out the dividends due on stocks you are short, but remember they also collect the dividends on the stocks they are long (those dividends don't count as negative expenses). The fund will also lend securities and collect revenue, but you don't see that as a negative to fund expenses.
The expense that matters is the 1.5%. The cap is only for a very small amount and it's in place and needed until fund assets grow, which reduces the expense ratio needed to cover expenses (some are fixed costs regardless of fund size). That is why funds like Vanguard/DFA are able to lower expenses over time
Hope that is helpful
Last edited by matjen on Mon Jun 08, 2015 9:40 am, edited 3 times in total.
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Re: QSPIX - thoughts on interesting fund

Post by nisiprius » Mon Jun 08, 2015 9:34 am

In short, this fund is so complicated that it is hard to tell how much it costs.

AQR's web page
Image

I've never seen that big a gap between "gross expenses" and stated expense ratio. And notice that it is "net expenses" as well as "gross expenses" that stated as 2.61%! It's not like Fidelity which at one time had "gross expenses" of 0.20% on Fidelity Spartan Total Market capped at 0.10%. And while they may "fully intend to keep the 150 bps expense cap in place for perpetuity" I would like to see that in writing from AQR--even qualified with the phrase "fully intend"--and all I see on that web page is "expense cap expiration date 4/30/2016."
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Re: QSPIX - thoughts on interesting fund

Post by matjen » Mon Jun 08, 2015 9:45 am

nisiprius wrote: And while they may "fully intend to keep the 150 bps expense cap in place for perpetuity" I would like to see that in writing from AQR--even qualified with the phrase "fully intend"--and all I see on that web page is "expense cap expiration date 4/30/2016."


Nisi, see Larry quote directly from AQR above: "Note also that they fully intend to keep the 150bps expense cap in place in perpetuity. The fund ‘s board is required by the SEC to periodically review the funds fees/cap, etc… to ensure they remain suitable, which is why they are required to list an “end date” such as May/2014."

But I am glad that we have established that Nisi wants contractual language changed and backpacker wants to be trained as an AQR trader in order to give AQR their stamp of approval...

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Re: QSPIX - thoughts on interesting fund

Post by packer16 » Mon Jun 08, 2015 9:52 am

I think the total 2.61% is what it costs to implement the strategy, a good portion being dividends paid to short stocks. Depending upon whether you think shorting Is required in your portfolio or not (I don't think so) determines whether 2.61% is appropriate or 1.5% is appropriate. Vanguard Market Neutral has the same issue. IMO the dividends to paid to short the stock is an additional cost this fund chooses to get its return so to compare it to long only funds you should include as a cost.

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Re: QSPIX - thoughts on interesting fund

Post by matjen » Mon Jun 08, 2015 10:10 am

backpacker wrote:Maybe I'm overreacting. What I want AQR to do is give me a document describing the basic screens and weightings used to construct the fund, enough that I could at least roughly build the fund from scratch, at least in theory. Their attitude seems to be "We're smart. So just give us your money."



I think you are overreacting! :-)

Complete holdings and all the Prospectus stuff: https://funds.aqr.com/our-funds/alterna ... fund#qspix

Arizona Pension System Info
https://www.azasrs.gov/sites/default/fi ... -18-14.pdf


Understanding Style Premia: http://scholar.google.com/scholar_url?u ... s=1920x911

Antii Ilmanen presentation:
Beyond the Equity Premium
http://video.cfainstitute.org/services/ ... 7796306001

Style Investing: The Long and the Long/Short of It
https://www.aqr.com/library/books-perio ... hort-of-it
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Re: QSPIX - thoughts on interesting fund

Post by Ketawa » Mon Jun 08, 2015 11:03 am

packer16 wrote:I think the total 2.61% is what it costs to implement the strategy, a good portion being dividends paid to short stocks. Depending upon whether you think shorting Is required in your portfolio or not (I don't think so) determines whether 2.61% is appropriate or 1.5% is appropriate. Vanguard Market Neutral has the same issue. IMO the dividends to paid to short the stock is an additional cost this fund chooses to get its return so to compare it to long only funds you should include as a cost.


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.

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Re: QSPIX - thoughts on interesting fund

Post by Random Walker » Mon Jun 08, 2015 11:27 am

Ketawa,
Excellent explanation of the payment of dividends on the shorts. Thanks!

Dave

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Re: QSPIX - thoughts on interesting fund

Post by lack_ey » Mon Jun 08, 2015 11:28 am

backpacker, what you're looking for I think is mostly in "Investing with Style" here:
https://www.aqr.com/library/journal-art ... with-style

It states how each of the four styles is implemented (at a high level) in every asset class used, what the universe of securities is, and how much allocation is given to each style/asset class combination. This is a more thorough 37-page paper in a peer-reviewed journal, so more of the details are here (and not in a more slick-looking white paper). Of course, that doesn't by itself much change concerns about data mining or obviously using publications to sell their products. The raw simulated return for the strategy in 1990-2013 is 17.4% over the risk-free rate before (very significant) costs and trading. Though to be fair, the universe of securities is selected to be relatively liquid—the momentum and value are not being achieved in small caps because those are excluded, and they're not in the simulation carry trading obscure currencies. That said, I am not nearly as convinced as they claim to be about persistence and "out-of-sample degradation."

AQR is, for whatever it's worth, also a hedge fund and institutional money manager and tends to run at least some version of strategies in that space (e.g. risk parity) before offering them in mutual fund formats.


matjen wrote:Was my answer too complicated? Was Maynard's more detailed response as to the differences between this AQR fund and a Hedge Fund?

By the way I think a quote tree got messed up, as that was my response. Not that I care. I'm just afraid Maynard may be offended by being wrongly tagged with the incoherent ramblings of a rube. :P


packer16 wrote:I have no problem with risk, I just like to understand the risk I am taking so I can position my AA accordingly. IMO this fund has wide range of what the risk could be (similar sub-prime RMBS before the crash) and the returns look to be less than equity so what is the point if owning this versus increasing my equity or SCV exposure if I want to take more risk and being ahead 150bp (or 260bp in real costs) versus buying this? I think the thesis here is these guys have somehow come up with some "secret sauce" that other have not. These guys have to overcome 260bp of fees per year to break-even versus a long only combination of stock and bonds. This is the bet you are making here. If the fees were less it may make sense to take a chance but this IMO has a high probability of lagging index funds.

Packer

The "how much does it help?" question is answered in the paper, though that very obviously depends on the actual returns, and you can be sure they have a very high financial incentive to make things look attractive. I think with a somewhat reasonable level of confidence (not full confidence because every market and especially crash is different) we can say that the behavior is largely going to be uncorrelated with stocks and bonds by nature of the hedging, historical simulations, and the year-and-a-half live results. But from basic MPT even with fairly low positive returns you may want some. The only real attack you can levy is that you expect the returns to be solidly 0 or negative, in which case you're really not adding much of anything useful.

In any case, all of the strategies employed here are already in use by hedge funds and others. They just jam-packed a bunch of them all together and offered it as a mutual fund. The only secret sauce here is in implementation details at a low level, such as security weightings, exact modeling of volatility and risk management for constructing and managing each slice as conditions change, and when to trade to maximize impact while minimizing trading costs.

The differentiator here really is in using multiple strategies and asset classes. None of this stuff, even historically, works consistently. Even the combination didn't. There will be bad years, just maybe not as bad as the bad years of a single strategy or two of them. Now, if the premia dry up in the securities used, there won't be many good years either, so there's the rub.

Anyway, like I said earlier, anyone in this fund should take a long look at the (non-AQR) literature on all of these strategies.
Last edited by lack_ey on Mon Jun 08, 2015 11:35 am, edited 2 times in total.

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Re: QSPIX - thoughts on interesting fund

Post by pkcrafter » Mon Jun 08, 2015 11:33 am

Nisiprius wrote:
In short, this fund is so complicated that it is hard to tell how much it costs.

To continue with this idea, the fund is so complicated that we now have 92 posts and no agreement on how it works. :confused

Their (AQR) attitude seems to be "We're smart. So just give us your money."

+1 All the interest, a.k.a. promotion, is coming from AQR.
You are lucky to get this fund at the discount rate of 1.5% it should cost you 2.61%

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

Post by Taylor Larimore » Mon Jun 08, 2015 11:52 am

Bogleheads:

This is a very important part of the Prospectus for the Style Premia Alternative Fund (QSPIX) :
Principal Risks of Investing in the Fund

Commodities Risk: Exposure to the commodities markets may subject the Fund to greater volatility than investments in
traditional securities. The value of commodity-linked derivative investments may be affected by changes in overall market movements, commodity index volatility, changes in interest rates, or factors affecting a particular industry or commodity, such as drought, floods, weather, embargoes, tariffs and international economic, political and regulatory developments.

Common Stock Risk: The Fund may invest in, or have exposure to, common stocks. Common stocks are subject to greater fluctuations in market value than certain other asset classes as a result of such factors as a company’s business performance, investor perceptions, stock market trends and general economic conditions.

Counterparty Risk: The Fund may enter into various types of derivative contracts. These derivative contracts may be privately negotiated in the over-the-counter market. These contracts also involve exposure to credit risk, since contract performance depends in part on the financial condition of the counterparty. If a privately negotiated over-the-counter contract calls for payments by the Fund, the Fund must be prepared to make such payments when due. In addition, if a counterparty’s creditworthiness declines, the Fund may not receive payments owed under the contract, or such payments may be delayed under such circumstances and the value of agreements with such counterparty can be expected to decline, potentially resulting in losses to the Fund.

Credit Risk: Credit risk refers to the possibility that the issuer of a security or the issuer of the reference asset of a derivative instrument will not be able to make principal and interest payments when due. Changes in an issuer’s credit rating or the market’s perception of an issuer’s creditworthiness may also affect the value of the Fund’s investment in that issuer. Securities rated in the four highest categories by the rating agencies are considered investment grade but they may also have some speculative characteristics. Investment grade ratings do not guarantee that bonds will not lose value.

Currency Risk: Currency risk is the risk that changes in currency exchange rates will negatively affect securities denominated in, and/or receiving revenues in, foreign currencies. The liquidity and trading value of foreign currencies could be affected by global economic factors, such as inflation, interest rate levels, and trade balances among countries, as well as the actions of sovereign governments and central banks. Adverse changes in currency exchange rates (relative to the U.S. dollar) may erode or reverse any potential gains from the Fund’s investments in securities denominated in a foreign currency or may widen existing losses.

Derivatives Risk: In general, a derivative instrument typically involves leverage, i.e., it provides exposure to potential gain or loss from a change in the level of the market price of the underlying security, currency or commodity (or a basket or index) in a notional amount that exceeds the amount of cash or assets required to establish or maintain the derivative instrument. Adverse changes in the value or level of the underlying asset or index, which the Fund may not directly own, can result in a loss to the Fund substantially greater than the amount invested in the derivative itself. The use of derivative instruments also exposes the Fund to additional risks and transaction costs. These instruments come in many varieties and have a wide range of potential risks and rewards, and may include, as further described in the section entitled “Principal Investment Strategies of the Fund,” futures contracts, forwards, options and swaps. A risk of the Fund’s use of derivatives is that the fluctuations in their values may not correlate perfectly with the overall securities markets. Additionally, to the extent the Fund is required to segregate or “set aside” (often referred to as “asset segregation”) liquid assets or otherwise cover open positions with respect to certain derivative instruments, the Fund may be required to sell portfolio instruments to meet these asset segregation requirements. There is a possibility that segregation involving a large percentage of the Fund’s assets could impede portfolio management or the Fund’s ability to meet redemption requests or other current obligations.

Emerging Market Risk: The Fund intends to have exposure to emerging markets. Emerging markets are riskier than more
developed markets because they tend to develop unevenly and may never fully develop. Investments in emerging markets may be considered speculative. Emerging markets are more likely to experience hyperinflation and currency devaluations, which adversely affect returns to U.S. investors. In addition, many emerging securities markets have far lower trading volumes and less liquidity than developed markets.

Foreign Investments Risk: Foreign investments often involve special risks not present in U.S. investments that can increase the chances that the Fund will lose money. These risks include:
• The Fund generally holds its foreign instruments and cash in foreign banks and securities depositories, which may be
recently organized or new to the foreign custody business and may be subject to only limited or no regulatory oversight.
• Changes in foreign currency exchange rates can affect the value of the Fund’s portfolio.
• The economies of certain foreign markets may not compare favorably with the economy of the United States with respect to such issues as growth of gross national product, reinvestment of capital, resources and balance of payments position.
• The governments of certain countries may prohibit or impose substantial restrictions on foreign investments in their capital markets or in certain industries.
• Many foreign governments do not supervise and regulate stock exchanges, brokers and the sale of securities to the same extent as does the United States and may not have laws to protect investors that are comparable to U.S. securities laws.
• Settlement and clearance procedures in certain foreign markets may result in delays in payment for or delivery of securities not typically associated with settlement and clearance of U.S. investments.

Forward and Futures Contract Risk: The successful use of forward and futures contracts draws upon the Adviser’s skill and experience with respect to such instruments and are subject to special risk considerations. The primary risks associated with the use of forward and futures contracts, which may adversely affect the Fund’s NAV and total return, are (a) the imperfect correlation between the change in market value of the instruments held by the Fund and the price of the forward or futures contract; (b) possible lack of a liquid secondary market for a forward or futures contract and the resulting inability to close a forward or futures contract when desired; (c) losses caused by unanticipated market movements, which are potentially unlimited; (d) the Adviser’s inability to predict correctly the direction of securities prices, interest rates, currency exchange rates and other economic factors; (e) the possibility that the counterparty will default in the performance of its obligations; and (f) if the Fund has insufficient cash, it may have to sell securities from its portfolio to meet daily variation margin requirements, and the Fund may have to sell securities at a time when it may be disadvantageous to do so.

Hedging Transactions Risk: The Adviser from time to time employs various hedging techniques. The success of the Fund’s
hedging strategy will be subject to the Adviser’s ability to correctly assess the degree of correlation between the performance of the instruments used in the hedging strategy and the performance of the investments in the portfolio being hedged. Since the characteristics of many securities change as markets change or time passes, the success of the Fund’s hedging strategy will also be subject to the Adviser’s ability to continually recalculate, readjust, and execute hedges in an efficient and timely manner. For a variety of reasons, the Adviser may not seek to establish a perfect correlation between such hedging instruments and the portfolio holdings being hedged. Such imperfect correlation may prevent the Fund from achieving the intended hedge or expose the Fund to risk of loss. In addition, it is not possible to hedge fully or perfectly against any risk, and hedging entails its own costs (such as trading commissions and fees).

High Portfolio Turnover Risk: The investment techniques and strategies utilized by the Fund, including investments made on a shorter-term basis or in derivative instruments or instruments with a maturity of one year or less at the time of acquisition, may result in frequent portfolio trading and high portfolio turnover. High portfolio turnover rates will cause the Fund to incur higher levels of brokerage fees and commissions, which may reduce performance, and may cause higher levels of current tax liability to shareholders in the Fund.

Interest Rate Risk: Interest rate risk is the risk that prices of fixed income securities generally increase when interest rates decline and decrease when interest rates increase. The Fund may lose money if short-term or long-term interest rates rise sharply or otherwise change in a manner not anticipated by the Adviser.

Investment in Other Investment Companies Risk: As with other investments, investments in other investment companies,
including exchange-traded funds (“ETFs”), are subject to market and manager risk. In addition, if the Fund acquires shares ofinvestment companies, shareholders bear both their proportionate share of expenses in the Fund (including management andadvisory fees) and, indirectly, the expenses of the investment companies. The Fund may invest in money market mutual funds. An investment in a money market mutual fund is not insured or guaranteed by a Federal Deposit Insurance Corporation or any other government agency. Although such funds currently seek to preserve the value of the Fund’s investment at $1.00 per share, it is possible to lose money by investing in a money market mutual fund. Moreover, recent rule amendments adopted by the SEC will require certain money market mutual funds to implement floating NAVs in the future that will not preserve the value of the Fund’s investment at $1.00 per share. The implementation of these rule amendments may impact the Fund’s use of these money market mutual funds for capital preservation purposes.

Leverage Risk: As part of the Fund’s principal investment strategy, the Fund will make investments in futures contracts,
forwards, options, swaps and other derivative instruments. These derivative instruments provide the economic effect of
financial leverage by creating additional investment exposure to the underlying instrument, as well as the potential for greater loss. If the Fund uses leverage through activities such as entering into short sales or purchasing derivative instruments, the Fund has the risk that losses may exceed the net assets of the Fund. The net asset value of the Fund while employing leverage will be more volatile and sensitive to market movements.

Manager Risk: If the Adviser makes poor investment decisions, it will negatively affect the Fund’s investment performance.

Market Risk: Market risk is the risk that the markets on which the Fund’s investments trade will increase or decrease in value. Prices may fluctuate widely over short or extended periods in response to company, market or economic news. Markets also tend to move in cycles, with periods of rising and falling prices. If there is a general decline in the securities and other markets, your investment in the Fund may lose value, regardless of the individual results of the securities and other instruments in which the Fund invests.

Mid-Cap Securities Risk: The Fund may invest in, or have exposure to the securities of mid-cap companies. The prices of
securities of mid-cap companies generally are more volatile than those of large capitalization companies and are more likely to be adversely affected than large-cap companies by changes in earnings results and investor expectations or poor economic or market conditions, including those experienced during a recession.

Model and Data Risk: Given the complexity of the investments and strategies of the Fund, the Adviser relies heavily on
quantitative models and information and data supplied by third parties (“Models and Data”). Models and Data are used to construct sets of transactions and investments, to provide risk management insights, and to assist in hedging the
Fund’s investments. When Models and Data prove to be incorrect or incomplete, any decisions made in reliance thereon expose the Fund to potential risks. Similarly, any hedging based on faulty Models and Data may prove to be unsuccessful. Some of the models used by the Adviser for the Fund are predictive in nature. The use of predictive models has inherent risks. Because predictive models are usually constructed based on historical data supplied by third parties, the success of relying on such models may depend heavily on the accuracy and reliability of the supplied historical data. The Fund bears the risk that the quantitative models used by the Adviser will not be successful in selecting investments or in determining the weighting of investment positions that will enable the Fund to achieve its investment objective. All models rely on correct market data inputs. If incorrect market data is entered into even a well-founded model, the resulting information will be incorrect. However, even if market data is input correctly, “model prices” will often differ substantially from market prices, especially for instruments with complex characteristics, such as derivative instruments.

Momentum Style Risk: Investing in or having exposure to securities with positive momentum entails investing in securities that have had above-average recent returns. These securities may be more volatile than a broad cross-section of securities. In addition, there may be periods during which the investment performance of the Fund while using a momentum strategy may suffer.

Non-Diversified Status Risk: The Fund is a non-diversified fund. Because the Fund may invest in securities of a smaller number of issuers, the Fund may be more exposed to the risks associated with and developments affecting an individual issuer than a fund that invests more widely, which may, therefore, have a greater impact on the Fund’s performance.

Options Risk: An option is an agreement that, for a premium payment or fee, gives the option holder (the purchaser) the right but not the obligation to buy (a “call option”) or sell (a “put option”) the underlying asset (or settle for cash an amount based on an underlying asset, rate, or index) at a specified price (the “exercise price”) during a period of time or on a specified date. Investments in options are considered speculative. When the Fund purchases an option, it may lose the premium paid for it if the price of the underlying security or other assets decreased or remained the same (in the case of a call option) or increased or remained the same (in the case of a put option). If a put or call option purchased by the Fund were permitted to expire without being sold or exercised, its premium would represent a loss to the Fund.

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

Sovereign Debt Risk: The Fund may invest in, or have exposure to, sovereign debt instruments. These investments are subject to the risk that a governmental entity may delay or refuse to pay interest or repay principal on its sovereign debt, due, for example, to cash flow problems, insufficient foreign currency reserves, political considerations, the relative size of the governmental entity’s debt position in relation to the economy or the failure to put in place economic reforms required by the International Monetary Fund or other multilateral agencies. If a governmental entity defaults, it may ask for more time in which to pay or for further loans. There is no legal process for collecting sovereign debt that a government does not pay nor are there bankruptcy proceedings through which all or part of the sovereign debt that a governmental entity has not repaid may be collected.

Subsidiary Risk: By investing in the Subsidiary, the Fund is indirectly exposed to the risks associated with the Subsidiary’s
investments. The commodity-related instruments held by the Subsidiary are generally similar to those that are permitted to be held by the Fund and are subject to the same risks that apply to similar investments if held directly by the Fund. There can be no assurance that the investment objective of the Subsidiary will be achieved. The Subsidiary is not registered under the 1940 Act, and, unless otherwise noted in this prospectus, is not subject to all the investor protections of the 1940 Act. However, the Fund wholly owns and controls the Subsidiary, and the Fund and the Subsidiary are both managed by the Adviser, making it unlikely that the Subsidiary will take action contrary to the interests of the Fund and its shareholders. The Board of Trustees has oversight responsibility for the investment activities of the Fund, including its investment in the Subsidiary, and the Fund’s role as sole shareholder of the Subsidiary. To the extent applicable to the investment activities of the Subsidiary, the Subsidiary will be subject to the same investment restrictions and limitations, and follow the same compliance policies and procedures, as the Fund. Unlike the Fund, the Subsidiary will not seek to qualify as a regulated investment company under Subchapter M of the Code. Changes in the laws of the United States and/or the Cayman Islands could result in the inability of the Fund and/or the Subsidiary to operate as described in this prospectus and the SAI and could adversely affect the Fund.

Swap Agreements Risk: Swap agreements involve the risk that the party with whom the Fund has entered into the swap will default on its obligation to pay the Fund. Additionally, certain unexpected market events or significant adverse market movements could result in the Fund not holding enough assets to be able to meet its obligations under the agreement. Such occurrences may negatively impact the Fund’s ability to implement its principal investment strategies and could result in losses to the Fund.

Tax Risk: In order for the Fund to qualify as a regulated investment company under Subchapter M of the Code, the Fund must derive at least 90 percent of its gross income each taxable year from qualifying income, which is described in more detail in the SAI. Income from certain commodity-linked derivative instruments in which the Fund invests is not considered qualifying income. The Fund will therefore restrict its income from direct investments in commodity-linked derivative instruments that do not generate qualifying income, such as commodity-linked swaps, to a maximum of 10 percent of its gross income. The Fund’s investment in the Subsidiary is expected to provide the Fund with exposure to the commodities markets within the limitations of the federal tax requirements of Subchapter M. The Fund has requested a private letter ruling from the Internal Revenue Service confirming that the annual net profit, if any, realized by the Subsidiary and imputed for income tax purposes to the Fund should constitute “qualifying income” for purposes of the Fund remaining qualified as a regulated investment company for U.S. federal income tax purposes. The Internal Revenue Service has indicated that the granting of private letter rulings, like the one requested by the Fund, is currently suspended, pending further internal discussion. As a result, there can be no expectation that the Internal Revenue Service will grant the private letter ruling requested. If the Internal Revenue Service doesnot grant the private letter ruling request, there is a risk that the Internal Revenue Service could assert that the annual net profit realized by the Subsidiary and imputed for income tax purposes to the Fund will not be considered “qualifying income” for purposes of the Fund remaining qualified as a regulated investment company for U.S. federal income tax purposes. Changes in the laws of the United States and/or the Cayman Islands could result in the inability of the Fund and/or its Subsidiary to operate as described in this prospectus and the SAI and could adversely affect the Fund. For example, the Cayman Islands does not currently impose any income, corporate or capital gains tax, estate duty, inheritance tax, gift tax or withholding tax on the Subsidiary. If Cayman Islands law changes such that the Subsidiary must pay Cayman Islands taxes, Fund shareholders would likely suffer decreased investment returns.

U.S. Government Securities Risk: Treasury obligations may differ in their interest rates, maturities, times of issuance and
other characteristics. Obligations of U.S. Government agencies and authorities are supported by varying degrees of credit butgenerally are not backed by the full faith and credit of the U.S. Government. No assurance can be given that the U.S.
Government will provide financial support to its agencies and authorities if it is not obligated by law to do so. Certain of thegovernment agency securities the Fund may purchase are backed only by the credit of the government agency and not by fullfaith and credit of the United States.

Value Style Risk: Investing in or having exposure to “value” stocks, as described in the “Principal Investment Strategies,” of the Fund, presents the risk that the stocks may never reach what the Adviser believes are their full market values, either because the market fails to recognize what the Adviser considers to be the companies’ true business values or because the Adviser misjudged those values. In addition, there may be periods during which the investment performance of the Fund while using a value strategy may suffer.

Volatility Risk: The Fund may have investments that appreciate or decrease significantly in value over short periods of time. This may cause the Fund’s net asset value per share to experience significant increases or declines in value over short periods of time, however, all investments long- or short-term are subject to risk of loss.

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

This fund is not for me.

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

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backpacker
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Re: QSPIX - thoughts on interesting fund

Post by backpacker » Mon Jun 08, 2015 12:16 pm

Ketawa wrote:
packer16 wrote:I think the total 2.61% is what it costs to implement the strategy, a good portion being dividends paid to short stocks. Depending upon whether you think shorting Is required in your portfolio or not (I don't think so) determines whether 2.61% is appropriate or 1.5% is appropriate. Vanguard Market Neutral has the same issue. IMO the dividends to paid to short the stock is an additional cost this fund chooses to get its return so to compare it to long only funds you should include as a cost.


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.


This is correct. Spelling it out a bit, suppose you own a share of Acme Corp worth $100. I borrow the share, sell it, and agree to replace it in six months (i.e. I short the stock). I'm on the hook not only to replace the stock but to replace any dividends that the stock pays over the next six months.

Now Acme Corp. has $10 in free cash flow. This raises the stock price to $110. This means I'm on the hood to buying a $110 stock. If they pay out the cash as a $10 dividend, the stock price drops to $100. I'm then on the hook for $10 (to replace the dividend) and $100 (to replace the stock). Either way, I'm on the hook for $110. Whether Acme decides to pay its free cash flow out as a dividend doesn't change the price of shorting its stock
Last edited by backpacker on Mon Jun 08, 2015 12:22 pm, edited 1 time in total.

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backpacker
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Re: QSPIX - thoughts on interesting fund

Post by backpacker » Mon Jun 08, 2015 12:18 pm

lack_ey wrote:backpacker, what you're looking for I think is mostly in "Investing with Style" here:
https://www.aqr.com/library/journal-art ... with-style

It states how each of the four styles is implemented (at a high level) in every asset class used, what the universe of securities is, and how much allocation is given to each style/asset class combination.


Thanks lack_ey, I'll give it a read. I often end up changing my mind on these things once I hack through enough of the details. I went through a long process of going from "this is stupid" to "this is great" in deciding on an allocation to microcap stocks (BRSIX). By the time we're done, I'll probably be a happy QSPIX investor. :wink:

countmein
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Re: QSPIX - thoughts on interesting fund

Post by countmein » Mon Jun 08, 2015 12:31 pm

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

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

Post by DaufuskieNate » Mon Jun 08, 2015 12:37 pm

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

This fund is not for me.

Best wishes.
Taylor


I don't think anyone would recommend this fund for a taxable account. Come to think of it, I wouldn't put Total Bond Index in a taxable account either.

I tried to cut and paste the risk section of TSM's prospectus into this post. It exceeded the allowable word count. Lawyers and the SEC love long risk sections.

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Taylor Larimore
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Re: QSPIX - thoughts on interesting fund

Post by Taylor Larimore » Mon Jun 08, 2015 1:13 pm

I tried to cut and paste the risk section of TSM's prospectus into this post. It exceeded the allowable word count. Lawyers and the SEC love long risk sections.

DaufuskieNate:

This is the (short) "Risk" section in the Prospectus for Vanguard Total Stock Market Index Fund:
Principal Risks
An investment in the Fund could lose money over short or even long periods. You
should expect the Fund’s share price and total return to fluctuate within a wide range,
like the fluctuations of the overall stock market. The Fund is subject to the following
risks, which could affect the Fund’s performance:
• Stock market risk, which is the chance that stock prices overall will decline. Stock
markets tend to move in cycles, with periods of rising prices and periods of falling prices.
In addition, the Fund’s target index may, at times, become focused in stocks of a
particular market sector, which would subject the Fund to proportionately higher
exposure to the risks of that sector.
• Index sampling risk, which is the chance that the securities selected for the Fund, in
the aggregate, will not provide investment performance matching that of the Fund’s
target index. Index sampling risk for the Fund should be low.

Prospectus for Total Stock Market Index Fund

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

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