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 Aug 16, 2015 1:35 pm

Yeah, people need to understand hedge-style (or market neutral) funds aren't anything like tilting to Small Value - where you're taking a chance on something that *might* boost returns in a bull market .. They're really much more about the *risk* aspect of a portfolio

It can be argued the key to investing is to minimise losses - as we all know, a 50% loss takes a 100% gain to recover .. So the philosophy behind funds like Yale is principally to avoid losses, because when markets are rallying, returns take care of themselves

I see these alternative investments as engineered asset classes, which principally exist to diversify your portfolio so that it's less reliant on market direction .. as we've seen both stocks and bonds can go decades with negative real returns .. Although these need to be viewed on much longer scales, this year we have seen months where stock markets and bonds have taken losses, and the 50% of my portfolio in alternatives has now drifted higher, which means I can keep buying on dips .. If nothing else, psychologically it decouples you from worrying about market direction so much, and I think could make it easier to follow good, disciplined investing habits
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HomerJ
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Re: QSPIX - thoughts on interesting fund

Post by HomerJ » Sun Aug 16, 2015 2:19 pm

Maynard F. Speer wrote:I see these alternative investments as engineered asset classes, which principally exist to diversify your portfolio so that
it's less reliant on market direction


They principally exist to make their managers filthy rich from your fees.

I worked for a HFT firm, and the owner didn't have any "customers". He had his money and his money alone invested, and he made hundreds of millions (over 14 years).

When you've truly got a winning strategy, you don't open up a hedge fund or mutual fund.
Last edited by HomerJ on Mon Aug 17, 2015 11:53 am, edited 1 time in total.

lack_ey
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Re: QSPIX - thoughts on interesting fund

Post by lack_ey » Sun Aug 16, 2015 2:31 pm

HomerJ wrote:
Maynard F. Speer wrote:I see these alternative investments as engineered asset classes, which principally exist to diversify your portfolio so that
it's less reliant on market direction


They principally exist to make their managers filthy rich from your fees.

I worked for a HFT firm (in IT), and the owner didn't have any "customers". He had his money and his money alone invested, and he made hundreds of millions (over 14 years).

When you've truly got a winning strategy, you don't open up a hedge fund or mutual fund.

You do if the capacity of the strategy is larger than the amount of money you have to work with. Then you can also make money on AUM. If your background is academic finance and analyzing features of entire public markets, drawing on public research, some of the strategies you come up with are going to be readily implementable with $1B and more.

Or if you really just like the prestige and having your name out there.

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packer16
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Re: QSPIX - thoughts on interesting fund

Post by packer16 » Sun Aug 16, 2015 3:00 pm

Maynard F. Speer wrote:Yeah, people need to understand hedge-style (or market neutral) funds aren't anything like tilting to Small Value - where you're taking a chance on something that *might* boost returns in a bull market .. They're really much more about the *risk* aspect of a portfolio

It can be argued the key to investing is to minimise losses - as we all know, a 50% loss takes a 100% gain to recover .. So the philosophy behind funds like Yale is principally to avoid losses, because when markets are rallying, returns take care of themselves

I see these alternative investments as engineered asset classes, which principally exist to diversify your portfolio so that it's less reliant on market direction .. as we've seen both stocks and bonds can go decades with negative real returns .. Although these need to be viewed on much longer scales, this year we have seen months where stock markets and bonds have taken losses, and the 50% of my portfolio in alternatives has now drifted higher, which means I can keep buying on dips .. If nothing else, psychologically it decouples you from worrying about market direction so much, and I think could make it easier to follow good, disciplined investing habits


Have you seen or obtained equity or SCV beating long-term performance from hedge funds? Are there any other advantages to an investor who holds a few years of living expenses in CDs and the rest in equity or risk investments? TIA.

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

Post by Maynard F. Speer » Sun Aug 16, 2015 4:09 pm

HomerJ wrote:They principally exist to make their managers filthy rich from your fees.


Same reason index trackers exist - Vanguard aren't really a philanthropic organisation (as much as rhetoric sometimes suggests)

But a successful capitalist venture is one that works well and benefits people .. There are plenty of lackluster market-neutral funds out there not making much for anyone


packer16 wrote:Have you seen or obtained equity or SCV beating long-term performance from hedge funds? Are there any other advantages to an investor who holds a few years of living expenses in CDs and the rest in equity or risk investments? TIA.

Packer


Oh absolutely .. And in part because by enabling greater diversification and potentially less tail risk, I've found it easier to shift my equities more towards value, smaller companies and start-ups

Obviously we haven't got long-term figures for QSPIX yet (and I can't invest in it in the UK) but here's an example of a very typical quant-style hedge fund (it's a fund-of-funds, the much derided 2 and 20% fee structure, but systematically traded, somewhat like QSPIX)

Image

And you can see in the short-term, returns look abysmal - these kinds of funds have had a particularly rough time since the financial crisis (as they benefit more from market divergence, while this QE environment has perhaps brought a lot up with the tides) - and the benchmark is essentially cash or CDs .. But by cushioning market downturns, you can get a sort of tortoise and hare analogy
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Ketawa
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Re: QSPIX - thoughts on interesting fund

Post by Ketawa » Sun Aug 16, 2015 6:02 pm

longinvest wrote:Let's look at a growth chart, just to verify this:

Morningstar: AQR Style Premia Alternative I (QSPIX) blue, Vanguard Total Stock Mkt Idx Adm (VTSAX) orange
Image

The only thing that is sure, with QSPIX, is that the investor will give at least 1.5% of his investment to AQR every single year, year after year after year.

You can believe the hype that only journalists can claim (as the SEC would probably sue AQR for making such claims) at the risk of your own wealth!


It has been pointed out countless times that a domestic equity fund is a completely inappropriate benchmark. QSPIX is a global fund; if you insist on comparing it to an equity benchmark, it should be something like VT.

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Re: QSPIX - thoughts on interesting fund

Post by larryswedroe » Sun Aug 16, 2015 6:29 pm

First, it should NOT be compared to an equity fund since it has about half the expected volatility, and no correlation with equities, nor should it be compared to a bond fund (say high quality intermediate) as it has no correlation to bonds but about 2x the volatility of that type fund.

Second, if you take the allocation from the equity side it should be compared to how the portfolio would have done without QSPIX vs. with it, and of course that should be to a globally diversified equity portfolio. And if taken from the bond side the return of the portfolio with it should be compared to return of portfolio without it.

Do not make the very common error of looking at things in isolation, especially when the purpose of adding the fund is to add a non correlating asset--.

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Re: QSPIX - thoughts on interesting fund

Post by longinvest » Sun Aug 16, 2015 8:46 pm

larryswedroe wrote:Do not make the very common error of looking at things in isolation, especially when the purpose of adding the fund is to add a non correlating asset--.

Larry,

Shouldn't I also avoid the common mistake of reading your alternative investment* recommendations in isolation?

* I don't know if that is the proper name. I mean investments in other things than stock and bond funds.

Let me try to avoid this mistake and go back to...

The Great Commodities Debate - Part I (February 11, 2008)
Larry Swedroe: It's true that commodities themselves have no expected real return. That's a pretty good reason to avoid investing in them. However, collateralizedcommodity futures, or CCFs, are another story.

The PIMCO Commodity Real Return Strategy fund, as an example, has total costs of about 1%. The portfolio managers use Treasury Inflation-Protected Securities (TIPS) as collateral to support the embedded commodity index derivatives. The real return on TIPS is about 2%, so the PIMCO fund provides a return, net of costs and inflation, of about 1%. That's above the real historic return of the benchmark one-month T-bill. Unless one forecasts persistent contango, where futures trade higher than the spot market, one should expect a real return from the PIMCO fund.


Swedroe: Futures, or more specifically, CCFs, are one of the rare asset classes that have negative correlation to both stocks and bonds. That makes them excellent risk diversifiers. A negative correlating asset acts just like portfolio insurance because it tends to produce higher-than-average returns when the other asset is producing lower-than-average returns.


I underlined your use of the present tense which implies that properties will also hold in the future.

Let's see what happened to this "great risk diversifier" for which "one should expect a real return" since February 11, 2008:

Morningstar: PIMCO Commodity Real Ret Strat Instl (PCRIX)
Image

Of course, you'll say that there were no guarantees.

Let's compare this to William Sharpe's approach. He wrote:
http://web.stanford.edu/~wfsharpe/art/active/active.htm
If "active" and "passive" management styles are defined in sensible ways, it must be the case that
(1) before costs, the return on the average actively managed dollar will equal the return on the average passively managed dollar and
(2) after costs, the return on the average actively managed dollar will be less than the return on the average passively managed dollar
These assertions will hold for any time period. Moreover, they depend only on the laws of addition, subtraction, multiplication and division. Nothing else is required.


That feels much better. What he says has to be true for any time period. It won't blow up in my face, if I adopt his strategy. Better, yet: I don't have to believe him, I just need to use basic arithmetic and verify his proof.

I will only get market returns (minus a tiny fee); I won't beat the market. That might seem lame, but it is guaranteed!

What I take away:
  1. The fees are certain.
  2. Believing some past Larry Swedroe strong claims was dangerous to one's wealth.
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VAB/ZRR

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Ketawa
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Re: QSPIX - thoughts on interesting fund

Post by Ketawa » Sun Aug 16, 2015 11:47 pm

Ketawa wrote:
longinvest wrote:Let's look at a growth chart, just to verify this:

Morningstar: AQR Style Premia Alternative I (QSPIX) blue, Vanguard Total Stock Mkt Idx Adm (VTSAX) orange
Image

The only thing that is sure, with QSPIX, is that the investor will give at least 1.5% of his investment to AQR every single year, year after year after year.

You can believe the hype that only journalists can claim (as the SEC would probably sue AQR for making such claims) at the risk of your own wealth!


It has been pointed out countless times that a domestic equity fund is a completely inappropriate benchmark. QSPIX is a global fund; if you insist on comparing it to an equity benchmark, it should be something like VT.


I just noticed this, but thought it should be pointed out for people following the thread that longinvest specifically chose the starting date of 12/13/13 for this growth chart, which is a little disgusting. Here is what QSPIX did from inception until that date.

Image

matjen already posted the full chart comparing it to VT since inception.

matjen wrote:As we used to say at high school basketball games. SCOREBOARD, SCOREBOARD, SCOREBOARD*...QSPIX, Total World, Total Bond, And Vanguard Market Neutral.

Image

*It should be pointed out that I fully expect VT to pull ahead eventually and that QSPIX should be viewed in the context of an entire portfolio not on its own...but this is fun. ;-)


And in the interest of highlighting the performance of QSPIX within a portfolio, here are updated numbers for what I posted on the first page of this thread.

Performance 01/01/2014 - 07/31/2015

Code: Select all

                           CAGR    Sharpe Ratio
60% VT/40% BND              4.7%       0.85
50% VT/40% BND/10% QSPIX    5.0%       1.07


Monthly Correlations 11/01/2013 - 07/31/2015

Code: Select all

Ticker       VT     BND    QSPIX
VT            -    -0.21   -0.10
BND        -0.21      -     0.06
QSPIX      -0.10    0.06      -

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backpacker
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Re: QSPIX - thoughts on interesting fund

Post by backpacker » Sun Aug 16, 2015 11:56 pm

longinvest wrote:
larryswedroe wrote:Futures, or more specifically, CCFs, are one of the rare asset classes that have negative correlation to both stocks and bonds. That makes them excellent risk diversifiers. A negative correlating asset acts just like portfolio insurance because it tends to produce higher-than-average returns when the other asset is producing lower-than-average returns.


Let's see what happened to this "great risk diversifier" for which "one should expect a real return" since February 11, 2008:

Morningstar: PIMCO Commodity Real Ret Strat Instl (PCRIX)
Image


PCRIX had dismal returns over the last eight years. That's true. What's more damning is that the "diversification benefits" of PCRIX fell through at the worst possible time in 2008. So much for commodities having "strong negative correlation" to stocks.

There are two kinds of diversification. There is fair weathered diversification and fowl weathered diversification. Faired weathered diversifiers are uncorrelated with risky assets during relative market calm. Fowl weathered diversifiers are uncorrelated with risky assets even during the worst market crashes.

Treasuries are fowl weathered. They hold up even when stocks come crashing down. Junk bonds are fair weathered. They behave somewhat differently that bonds and stocks but, in a market crash, junk bonds won't save your bacon. This chart from longinvest nicely illustrates that commodity futures are fair weathered. Anyone hoping that their gold-plated commodity fund would save their bacon in 2008 was SOL.

I don't see the point of fair weathered diversifiers. I don't worry about my portfolio bouncing up and down during good times. I worry about a market crash followed by a depression, one in which stocks take decades to recover.

Will QSPIX save your bacon in financial Armageddon? I have no idea. One reason to think not is that we don't understand factor premiums. One of the best theories, though, is that they exist because the relevant strategies tend to blow up at the wrong time. Investors make money on factor tilts during good times in exchange for worse returns during bad times. We saw this with momentum in 2008. Momentum lost -50% right after stocks lost -50%. With diversifiers like that, who needs enemies?

Another great example of fair weathered diversification is REITs, much touted by David Swenson and the rest of the Ivy portfolio gang. An asset that loses -75% when the market loses -50% is not my idea good diversification.

Correlation is basically worthless for telling us whether an asset is a good diversifier. Correlations count the behavior of assets in good times and bad times equally. But who cares about diversifying equity risk during good times? I care about diversifying it during the worst times.

Look. I'm not oppose to factors in principle. My portfolio is tilted way the heck to value stocks after all. But I don't expect that value premium to make my portfolio safer. It's cheap leverage. More risk, more expected reward. I'm not expecting it to save my bacon.

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Re: QSPIX - thoughts on interesting fund

Post by lack_ey » Mon Aug 17, 2015 12:35 am

backpacker, just an IMHO but I'll take both fair weathered and fowl feathered. I mean, foul weathered.

How about the scenario where the markets are sideways (bumpy or not) without any particular panics? There are more times to be had in the equity markets other than good and bad.

International equity diversification is fair weathered too. The long-term and intermediate-term rates of return can really diverge between different countries. However, in a bad enough downturn, all equities feel the pain.

Drawdown protection and focus is a lot more important for decumulation than accumulation, though, so it depends on needs.


As for CCFs, since 2008 they have been diversifiers from stocks and bonds, mostly, other than the collapse during the financial crisis. Both stocks and bonds have done well since the starting point there, and inflation and growth are lower than expected. When stocks and bonds do well and inflation is lower than everyone expected, you don't need and shouldn't expect commodities to do well too. The outcome we got was a world where at least in this short term, commodities did very poorly. Commodities still can return about inflation in the long run, though.

Anyway, the risks and drawdown patterns are different for all kinds of market conditions and crises. The next time is probably not going to be like 2008-2009.

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

Post by Maynard F. Speer » Mon Aug 17, 2015 12:56 am

longinvest wrote: Let's compare this to William Sharpe's approach. He wrote:
http://web.stanford.edu/~wfsharpe/art/active/active.htm
If "active" and "passive" management styles are defined in sensible ways, it must be the case that
(1) before costs, the return on the average actively managed dollar will equal the return on the average passively managed dollar and
(2) after costs, the return on the average actively managed dollar will be less than the return on the average passively managed dollar
These assertions will hold for any time period. Moreover, they depend only on the laws of addition, subtraction, multiplication and division. Nothing else is required.


That feels much better. What he says has to be true for any time period. It won't blow up in my face, if I adopt his strategy. Better, yet: I don't have to believe him, I just need to use basic arithmetic and verify his proof.

I will only get market returns (minus a tiny fee); I won't beat the market. That might seem lame, but it is guaranteed!

What I take away:
  1. The fees are certain.
  2. Believing some past Larry Swedroe strong claims was dangerous to one's wealth.


I know it irks you when I bring this up, but you're using this concept of efficient markets out of context here

In fact the William Sharpe quote you want is the one where he states that the optimal portfolio includes ALL tradable financial risk assets in market-weighted proportion ... And (for one) that means you would be holding hedge funds and alternatives

When it comes to asset allocation, the 'market' is either an equivalent benchmark, or it's the global market portfolio .. When you say 'beat the market' in this context, I don't know what you mean



backpacker wrote:PCRIX had dismal returns over the last eight years. That's true. What's more damning is that the "diversification benefits" of PCRIX fell through at the worst possible time in 2008. So much for commodities having "strong negative correlation" to stocks.

There are two kinds of diversification. There is fair weathered diversification and fowl weathered diversification. Faired weathered diversifiers are uncorrelated with risky assets during relative market calm. Fowl weathered diversifiers are uncorrelated with risky assets even during the worst market crashes.

Treasuries are fowl weathered. They hold up even when stocks come crashing down. Junk bonds are fair weathered. They behave somewhat differently that bonds and stocks but, in a market crash, junk bonds won't save your bacon. This chart from longinvest nicely illustrates that commodity futures are fair weathered. Anyone hoping that their gold-plated commodity fund would save their bacon in 2008 was SOL.

I don't see the point of fair weathered diversifiers. I don't worry about my portfolio bouncing up and down during good times. I worry about a market crash followed by a depression, one in which stocks take decades to recover.

Will QSPIX save your bacon in financial Armageddon? I have no idea.


There's a Jim Simons concept I like a lot when it comes to these kinds of issues

When asked how he made >70% annual returns (before fees) in RenTech over the past 20 years, he responded: "luck"

Now to us, 'luck' might equate to betting on a horse or roulette wheel .. And many people speak of factor tilts in this kind of way

But to a mathematician (Simons is one of the best in the world), luck is just shorthand for 'probability' .. And it's something that can be modelled and calculated with a high degree of accuracy .. A single roll of a dice might be pure chance - 1,000 rolls, and you've got things you can predict

Whether you're taking direct factor exposure or commodities, you're potentially giving yourself more rolls of the dice .. If you understand how noncorrelated assets interact, you'll know you can achieve a better risk-adjusted return through greater diversification ... As for 2008: almost everything fell that time - but as we know, no two beat markets are the same ... More rolls of the dice; more chances to move beyond the disordered realm of luck into the more orderly realm of probability
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Re: QSPIX - thoughts on interesting fund

Post by tarheel » Mon Aug 17, 2015 5:27 am

backpacker wrote:Correlation is basically worthless for telling us whether an asset is a good diversifier. Correlations count the behavior of assets in good times and bad times equally. But who cares about diversifying equity risk during good times? I care about diversifying it during the worst times.


This makes no sense. The only thing that matters is CAGR. A dollar made/lost during a downturn is worth exactly the same made/lost at any other moment in time.

I for one care very much about diversifying equity risk ALL of the time.

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Re: QSPIX - thoughts on interesting fund

Post by backpacker » Mon Aug 17, 2015 6:40 am

lack_ey wrote:backpacker, just an IMHO but I'll take both fair weathered and fowl feathered. I mean, foul weathered.


That's what I get for trying to write a post at. :oops:

lack_ey wrote: How about the scenario where the markets are sideways (bumpy or not) without any particular panics? There are more times to be had in the equity markets other than good and bad.

International equity diversification is fair weathered too. The long-term and intermediate-term rates of return can really diverge between different countries. However, in a bad enough downturn, all equities feel the pain.


The thing that keeps me up at night is mostly Japan. A single country that experiences a long depression while the rest of the world goes on. Whenever you read these papers about factor investing, they always say things like: "We found momentum everywhere internationally. Except for Japan." Momentum died when the economy died. Value kept trucking and, in fact, a value investor would have done fine in Japan. So putting all my cards on the table, maybe I do think that value investing will make my portfolio a bitter safer after all. :happy

So anyway, I might count the years after the Japan crash as good example of a flat market where momentum, at least, wasn't of much help.

A lot of this comes down to fees. International investing is foul weathered enough (in e.g. Japan scenarios) to be worth an extra 10 basis point or whatever. If it cost 150 basis points, I would be an all US investor and take my chances. If AQR would sell me their gold plated factor strategies for 30 basis points, I would probably own some. At 150 basis points, its hard to get very excited. Especially when compared to a simpler strategy like switching equities to SCV and holding more treasuries, a strategy that can be executed basically for free (i.e. the Larry portfolio).

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Re: QSPIX - thoughts on interesting fund

Post by backpacker » Mon Aug 17, 2015 6:42 am

tarheel wrote:
backpacker wrote:Correlation is basically worthless for telling us whether an asset is a good diversifier. Correlations count the behavior of assets in good times and bad times equally. But who cares about diversifying equity risk during good times? I care about diversifying it during the worst times.


This makes no sense. The only thing that matters is CAGR. A dollar made/lost during a downturn is worth exactly the same made/lost at any other moment in time.


Not if equities are mean reverting. Every dollar in my alternatives that I don't lose during a crash can be reinvested in equities at (usually) higher than normal expected returns. Discount rates go up during a crisis. This is how treasuries earn their keep.

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Re: QSPIX - thoughts on interesting fund

Post by backpacker » Mon Aug 17, 2015 6:49 am

Maynard F. Speer wrote: Whether you're taking direct factor exposure or commodities, you're potentially giving yourself more rolls of the dice .. If you understand how noncorrelated assets interact, you'll know you can achieve a better risk-adjusted return through greater diversification ... As for 2008: almost everything fell that time - but as we know, no two beat markets are the same ... More rolls of the dice; more chances to move beyond the disordered realm of luck into the more orderly realm of probability.


Maybe put it this way. In the long run, I'm pretty sunny about the global equity market. I think the odds of waking up in 40 years and finding that the global equity markets are not startlingly higher is basically zilch. So I don't worry much about equities in the long-run. In the short-run, I do worry. So I own cash and treasuries. What I don't see is where gold plated alternatives fit in. I don't need them in the long-run. And in the short run, I already have my cash/treasuries.

I'm not opposed to alternatives in principle. David Swenson should be doing whatever it is that he's doing. I'm just skeptical that the gold plated "alternatives" sold to investors are worth very much. When they work, alternatives seem to work because they're investments not everyone can do easily. (Elite private equity and venture capital firms, timberland, maybe farms...)

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Re: QSPIX - thoughts on interesting fund

Post by packer16 » Mon Aug 17, 2015 6:59 am

Backpacker's comment reflects my issue with QSPIX. If you are running a portfolio where you keep your living expenses in low risk assets like CDs or short-term bonds and the rest is in growth investments then IMO QSPIX has no place. With your growth investment you want to maximize returns, your are using your other bucket to deal with volatility.

QSPIX becomes interesting if you can get equity type returns for lower risk because your expected return is not lowered. Based upon comments here it appears this fund is suppose to have lower expected returns than equity. I am not interested in giving up return for lower volatility because of the bucket strategy described above. In addition, based upon performance to date, it appears have less than US equity fund returns with the possibility (as with most quant funds) of a blow-out in a crisis. BTW this is reason why commodities and other alternatives (unless I can get a 10% total return) not just QSPIX are of little use in this situation either.

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

Post by Maynard F. Speer » Mon Aug 17, 2015 7:40 am

backpacker wrote:
Maynard F. Speer wrote: Whether you're taking direct factor exposure or commodities, you're potentially giving yourself more rolls of the dice .. If you understand how noncorrelated assets interact, you'll know you can achieve a better risk-adjusted return through greater diversification ... As for 2008: almost everything fell that time - but as we know, no two beat markets are the same ... More rolls of the dice; more chances to move beyond the disordered realm of luck into the more orderly realm of probability.


Maybe put it this way. In the long run, I'm pretty sunny about the global equity market. I think the odds of waking up in 40 years and finding that the global equity markets are not startlingly higher is basically zilch. So I don't worry much about equities in the long-run. In the short-run, I do worry. So I own cash and treasuries. What I don't see is where gold plated alternatives fit in. I don't need them in the long-run. And in the short run, I already have my cash/treasuries.

I'm not opposed to alternatives in principle. David Swenson should be doing whatever it is that he's doing. I'm just skeptical that the gold plated "alternatives" sold to investors are worth very much. When they work, alternatives seem to work because they're investments not everyone can do easily. (Elite private equity and venture capital firms, timberland, maybe farms...)


Well if you're right about equities, you probably don't need alternatives .. My own pessimism means I'd probably struggle to keep up with a very equity-heavy portfolio if we got back to the kind of growth we saw in the 80s

Then again, 10-20% as a hedge in case your perspective doesn't play out might still be reasonable .. Equities have gone 73 years making sub-bond returns before - we've obviously seen markets like Japan's, which have lost 80% over a number of decades, despite society not breaking down and regressing back to bartering and barbarianism

Market neutral funds, for me, are a cash alternative - and with uncertainty hanging over bonds, a bond alternative too .. I also can't overstate how beneficial I think it can be, behaviourally, to have a portfolio that doesn't worry you .. With large 60:40 portfolios, I think it took incredible discipline to rebalance into equities during 2008/09 - buying at the bottom would've felt like investing in the burning wreckage of capitalism .. Buffett and Swensen have achieved very similar things with 100% domestic equities and cash, vs about 9% domestic equities - so more than one way to skin a cat, I suspect
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Re: QSPIX - thoughts on interesting fund

Post by Johno » Mon Aug 17, 2015 9:29 am

afan wrote:
Johno wrote: If you mean 'data mining' in the sense of flawed over-fitted statistics, you haven't provided any evidence.


1. I am not sure you get what "data mining" means.

It is not an insult. It is not a careless way of saying one does not like something. It has nothing to do with flawed statistics (unless someone presents spurious significance metrics).

The problem is that you can always find relationships with enough backtesting. If you take an introductory course in statistics, you will do an exercise in which you generate numerous sets of random numbers, then run a multiple regression of combinations of the random data sets against yet another random data set. By hunting through this, you will find some high correlations.

2. As for an "argument", as I indicated. the only way to know whether you have this situation is to run the analysis on out of sample data. Here, we have no out of sample data. Hence the need to accumulate some. My estimate of 10 to 20 years is only a guess. Longer if we are dealing with only one fund. Perhaps less if there are lots of funds.

3. As I keep pointing out, the managers of this fund promise to keep doing backtests and keep changing the factor bets. If they do this, then there may never be a long enough period with a stable set of bets to determine whether the strategy is working. You MIGHT decide the fund did well over a long period of time, or decide it did poorly, but that would be a test of the success of the active management choices of factor bets, along with whatever else they may have done.

4. They are producing a standard multiple testing. false discovery problem. It would certainly come up in an introductory course in statistics, see above, and approaches to it remain under active study.

Campbell Harvey has worked on it specifically in the economic context.

On 1 and 4 you've just shifted from a completely generic statement to a further description of a generic problem. You've still given no specifics as to what about the statistics presented by AQR you find non-robust, in terms of specific statistical tests. Yes it's basic statistics that there can be a problem with false positive 'factors', but you've given zero insight into why and how that applies specially to QSPIX as opposed to say, a conclusion based on past performance that a significant equity risk premium return is likely.

And again on 1. you seem with due respect to be the one who is shaky on the concept of 'data mining', as when you seemed to imply that if QSPIX's premia actually exist and give real return, but many other funds/managers exploit them so that the returns decline or disappear, that would show 'data mining'.

2. As mentioned, the factors have shown up in various periods of historical data, which are 'out of sample' wrt one another, and research independent of AQR, for a long time. Some in fact qualify as common knowledge. For example it's frankly ridiculous to call the currency carry trade a statistical artifact, the meaning which you've clarified you are at least *trying* to express by the term 'data mining', even though some of your statements strongly imply you're including 'the world can change' under the heading 'data mining'. The currency carry trade may or may not continue to be remunerative, but it clearly has been in general; that's very far from some academic discovery by one set of researchers awaiting confirmation from anyone else.

The statistics don't know the difference between finding a result in two independent sets of historic data and finding the result in historical data at a given time then finding it or not in new data after the initial discovery is publicized. The difference between those two situations is not 'basic statistics'. It's that the process of returns itself might have changed, and moreover that part of the change might have specifically been caused by the discovery being publicized. So again the next 15yrs of the fund's performance is not special in any way statistically compared to splitting up past results into 15 yr periods, except that the world can further change, in part via increased attempts to harvest the premia, based on greater knowledge of their past existence.

3. No, you've kept saying 'the strategy can change so we'll never know what it is', which is actually quite different than 'the factor bets will change', according to a given sets of tests as to which assets rate favorable/unfavorable on factors such as momentum, value, carry and 'defensive', which is actually what the fund says.

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Re: QSPIX - thoughts on interesting fund

Post by grap0013 » Mon Aug 17, 2015 10:44 am

Ketawa wrote:

Code: Select all

                           CAGR    Sharpe Ratio
60% VT/40% BND              4.7%       0.85
50% VT/40% BND/10% QSPIX    5.0%       1.07


Monthly Correlations 11/01/2013 - 07/31/2015

Code: Select all

Ticker       VT     BND    QSPIX
VT            -    -0.21   -0.10
BND        -0.21      -     0.06
QSPIX      -0.10    0.06      -


And boom goes the dynamite! All you naysayers have to eat your hats until this 60:40 mix is better off in the absence of QSPIX. :P
There are no guarantees, only probabilities.

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Re: QSPIX - thoughts on interesting fund

Post by HomerJ » Mon Aug 17, 2015 11:51 am

grap0013 wrote:
Ketawa wrote:

Code: Select all

                           CAGR    Sharpe Ratio
60% VT/40% BND              4.7%       0.85
50% VT/40% BND/10% QSPIX    5.0%       1.07


Monthly Correlations 11/01/2013 - 07/31/2015

Code: Select all

Ticker       VT     BND    QSPIX
VT            -    -0.21   -0.10
BND        -0.21      -     0.06
QSPIX      -0.10    0.06      -


And boom goes the dynamite! All you naysayers have to eat your hats until this 60:40 mix is better off in the absence of QSPIX. :P


Sharpe Ratio is pretty meaningless once you get into "alternative" investments with options and derivatives. Sharpe ratio depends on a normal distribution curve, which is weak even for stocks and bonds... The real risk is a fat-tail event, which has not shown up yet.

It may never show up. Cliff Asness and his team may have constructed the perfect fund that cannot fail.

But maybe they haven't. I submit you don't really know what the risk is.

You keep on getting excited about picking up nickels in the street in front of a steam-roller.

Extra nickels are nice... But I don't need the extra nickels, and I don't like the chance (even though probably very small) of slipping in front of a steam-roller.

Edit: But to be fair, you only have 5%-10% of your money in this fund, so slipping in front of the steam-roller isn't really the right analogy. You're already controlling risk by keeping your exposure low.

I still don't think you have any idea how much risk you're actually taking though.

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Re: QSPIX - thoughts on interesting fund

Post by afan » Mon Aug 17, 2015 12:55 pm

Past data is out of sample only if AQR did not know about it when constructing their tests.

This probably describes some data sources, but unlikely that it describes the data that anyone would care about. Perhaps they did not take into account the history of the Zimbabwe market, but then, it is so small that it would hardly affect any real world investing.

Again "data mining" is not an insult from which someone need be defended. It is a process. The concern arises when the step after finding something is "let's run with it" as opposed to "let's get some more data and see whether it holds up".

This is not a concern unique to what AQR is doing with this fund. This is a concern that applies whenever one comes up with a new financial approach based on historical data, but before confirming out of sample.

This concern applies to ALL inferences based on historical data that have not been confirmed out of sample. Not just this fund. Not just AQR. Not just financial products. For example, it has long been a huge problem in tests of causes and treatment of diseases. It has gotten to the point in medicine that they don't pay much attention at all to the results of retrospective explorations. Many observations in the scientific literature are given credence only when confirmed with new data, for the same reason. In those fields, as in finance, there is also the problem that new findings that appear to work get lots of attention, while new ones that do not are ignored. This means it is often impossible to know how many tests have been run on the available data and hence no way to correct for multiple comparisons. In these fields and many others, you simply have to wait for oos data. Until then, you don't know what to make of the new findings.

Harvey attempts to wrestle with this challenge in finance, where getting new data takes years or decades.

You really should read the paper. It is available for free and not very long...
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Re: QSPIX - thoughts on interesting fund

Post by afan » Mon Aug 17, 2015 1:03 pm

HomerJ wrote: The real risk is a fat-tail event, which has not shown up yet.

...
I still don't think you have any idea how much risk you're actually taking though.


Those are the points. Until you have enough real world data, you don't know the return distribution of this strategy, even if it were static. Since they promise it will change, you likely never will know the return distribution.

It is possible that this really does maintain returns while reducing risk. But until tested out of sample, and long enough for the unlikely events to occur, no one knows.

My skepticism is based on what happens to most brilliant investing ideas. They fade as they fail. This could be the real thing. Ten-20 years of stable implementation and we may know. Before that, it is gambling on being lucky enough to have picked a winner. I don't like negative expected return/high positive skew bets enough to be a gambler. But each to their own.
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Re: QSPIX - thoughts on interesting fund

Post by Johno » Mon Aug 17, 2015 1:40 pm

afan wrote:Past data is out of sample only if AQR did not know about it when constructing their tests.


First this sticks with a basic error of your previous statements. It supposes that the general results (premia such as for carry, value, momentum, 'defensive') were never found until one set of researchers treated one set of data. That's not so. Various people associated with AQR have been showing similar findings for years, not just from when this fund was launched. And other researchers have made similar findings about various of premia further back still (so different historical v 'since' data) as another poster specifically pointed out an example of. And some qualify as common knowledge (the currency carry trade). So again gets back to you describing a general statistical problem but not applying it with any specifics to the case we're talking about. I don't think others need to read generic papers, but rather you need to specify in context of the actual history of research in the premia QSPIX aims to 'harvest' what you think the specific statistics issue is.

Second it's of definite significance if a general result appears in different independent periods, even if they are all in the past as of a given research finding, especially to the degree the results are relatively uniform. It doesn't need to be new data subject to the variation in statistical significance in different, independent past periods. Again mainly what new data adds is the potential for the process of returns to significantly change either in general or even specifically in reaction to publicized findings of past research. This is always possible.

It's two different things. One would be that statistical tests were inadequate or had telltale tendency to vary greatly between long independent subsets of past data. This might lead to reasonable suspicion of an 'over fitted' result (which is really the term you've been looking for I think). If you think that's so, why *specifically*, in terms of AQR's results, and in the context of others' research into similar factors, do you think so? But then separately there is an indeterminate likelihood that past risk premia which highly likely existed nonetheless have lower return or disappear altogether in the future. Everyone accepts the latter possibility.

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Re: QSPIX - thoughts on interesting fund

Post by grap0013 » Mon Aug 17, 2015 1:51 pm

HomerJ wrote:I still don't think you have any idea how much risk you're actually taking though.


Definitely "riskier" than investing in Total Stock Market through Vanguard because there are so many unknowns with QSPIX and it is an unproven strategy in real world implementation for sure. Although I am willing to pay an extra 1.5% on 10% of my portfolio for 0.3% excess total return and lower downside volatility. Real portfolio total returns are all that matter and so far the proof is in the pudding.
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Re: QSPIX - thoughts on interesting fund

Post by afan » Mon Aug 17, 2015 2:35 pm

"You don't know how much risk you are taking" does not mean "I predict you are taking a lot of risk". It means what it says, the risk implied in this approach is currently unknown. There will be some idea of this, if the approach persists, once there are enough data to see what happens in extreme events. It is possible the method will work perfectly, there are no unknown correlations that will ruin the postulated risk controls, costs will be reasonable, and it does not lend itself to being exploited by others. Not many things are like that, but this could be. It may be that the risk is very low. Not saying it is not. Just saying that you don't know.

Johno,

Probably my fault for trying to condense this down to forum posts. Think about what independent means in this context. Think about what out of sample means. Think about publication bias. Think about the differences in performance of hypothetical portfolio constructs and their behavior in the real world, where the assumption that you have accounted for all relevant factors may or may not be true. Think about the need for data from the real world on this particular management approach, not just whether a given factor exists. Read the papers.

Or don't. Just a suggestion. It is a free country.
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Re: QSPIX - thoughts on interesting fund

Post by lack_ey » Mon Aug 17, 2015 8:16 pm

What about "this particular management approach" (for harvesting returns) is of concern with respect to factor persistence and the relevant topic? People keep bringing this up as a concern (see references to black boxes, trading, we don't know what's going on, too complex, etc.), and sure, execution is always an issue to some degree, but what specifically? Are they underestimating or understating transaction costs, moving the markets too much by placing buy/sell orders, etc.? Or what?

No financial data is really independent, but close enough will do if the caveats are understood and you have enough data. Yes, we understand what's out of sample and what's not. Which specifically are the "relevant factors" that may or may not have been accounted for that create a difference between theoretical simulated portfolio performance and live money results?

But still, you don't mention which styles you think are more suspect than others and in which ways. You could plop down these exact words in front of most any new fund of this type, because nothing specifically has been addressed about this fund in particular.

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Re: QSPIX - thoughts on interesting fund

Post by tarheel » Tue Aug 18, 2015 5:14 am

backpacker wrote:
tarheel wrote:
backpacker wrote:Correlation is basically worthless for telling us whether an asset is a good diversifier. Correlations count the behavior of assets in good times and bad times equally. But who cares about diversifying equity risk during good times? I care about diversifying it during the worst times.


This makes no sense. The only thing that matters is CAGR. A dollar made/lost during a downturn is worth exactly the same made/lost at any other moment in time.


Not if equities are mean reverting. Every dollar in my alternatives that I don't lose during a crash can be reinvested in equities at (usually) higher than normal expected returns. Discount rates go up during a crisis. This is how treasuries earn their keep.


Ok, then it works the same way when equities are overvalued and every dollar remaining in equities can be reinvested in your alternative/treasuries. Rebalancing works both ways with non-correlated assets.

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Re: QSPIX - thoughts on interesting fund

Post by tarheel » Tue Aug 18, 2015 5:23 am

HomerJ wrote:
grap0013 wrote:
Ketawa wrote:

Code: Select all

                           CAGR    Sharpe Ratio
60% VT/40% BND              4.7%       0.85
50% VT/40% BND/10% QSPIX    5.0%       1.07


Monthly Correlations 11/01/2013 - 07/31/2015

Code: Select all

Ticker       VT     BND    QSPIX
VT            -    -0.21   -0.10
BND        -0.21      -     0.06
QSPIX      -0.10    0.06      -


And boom goes the dynamite! All you naysayers have to eat your hats until this 60:40 mix is better off in the absence of QSPIX. :P


Sharpe Ratio is pretty meaningless once you get into "alternative" investments with options and derivatives. Sharpe ratio depends on a normal distribution curve, which is weak even for stocks and bonds... The real risk is a fat-tail event, which has not shown up yet.

It may never show up. Cliff Asness and his team may have constructed the perfect fund that cannot fail.

But maybe they haven't. I submit you don't really know what the risk is.

You keep on getting excited about picking up nickels in the street in front of a steam-roller.

Extra nickels are nice... But I don't need the extra nickels, and I don't like the chance (even though probably very small) of slipping in front of a steam-roller.

Edit: But to be fair, you only have 5%-10% of your money in this fund, so slipping in front of the steam-roller isn't really the right analogy. You're already controlling risk by keeping your exposure low.

I still don't think you have any idea how much risk you're actually taking though.


I think by using the steam roller analogy, you are talking about the carry trade. It is only a part of the strategy, which relies on value, momentum, carry and defensive.

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Re: QSPIX - thoughts on interesting fund

Post by nisiprius » Tue Aug 18, 2015 6:24 am

Morningstar's "portfolio" tab show this. What does it mean to have a "large core" style with 0's in all of the style boxes? Why is there a 0 in all the style boxes if the fund actually is holding 17% stocks?)

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Re: QSPIX - thoughts on interesting fund

Post by Maynard F. Speer » Tue Aug 18, 2015 6:41 am

Do you think maybe Large Core represents the stocks it's trading, but the zeros in the style boxes represent the fact (?) it's got net zero beta exposure?

I'd imagine it's the way those boxes are calculated - so it's trading Large Caps but has no net exposure to large caps
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Re: QSPIX - thoughts on interesting fund

Post by matjen » Tue Aug 18, 2015 6:57 am

tarheel wrote:
HomerJ wrote:
grap0013 wrote:
Ketawa wrote:

Code: Select all

                           CAGR    Sharpe Ratio
60% VT/40% BND              4.7%       0.85
50% VT/40% BND/10% QSPIX    5.0%       1.07


Monthly Correlations 11/01/2013 - 07/31/2015

Code: Select all

Ticker       VT     BND    QSPIX
VT            -    -0.21   -0.10
BND        -0.21      -     0.06
QSPIX      -0.10    0.06      -


And boom goes the dynamite! All you naysayers have to eat your hats until this 60:40 mix is better off in the absence of QSPIX. :P


Sharpe Ratio is pretty meaningless once you get into "alternative" investments with options and derivatives. Sharpe ratio depends on a normal distribution curve, which is weak even for stocks and bonds... The real risk is a fat-tail event, which has not shown up yet.

It may never show up. Cliff Asness and his team may have constructed the perfect fund that cannot fail.

But maybe they haven't. I submit you don't really know what the risk is.

You keep on getting excited about picking up nickels in the street in front of a steam-roller.

Extra nickels are nice... But I don't need the extra nickels, and I don't like the chance (even though probably very small) of slipping in front of a steam-roller.

Edit: But to be fair, you only have 5%-10% of your money in this fund, so slipping in front of the steam-roller isn't really the right analogy. You're already controlling risk by keeping your exposure low.

I still don't think you have any idea how much risk you're actually taking though.


I think by using the steam roller analogy, you are talking about the carry trade. It is only a part of the strategy, which relies on value, momentum, carry and defensive.


Exactly what I was thinking tarheel. HomerJ is just spreading generic FUD. This fund may perform poorly over the long haul because of expenses (ER and trading) but to bang the drum over all this incredible "risk" is misguided. To compare to LTCM or other funds that AQR/Asness have that had a bad year (and, of course, ignore the long term excellent performance) is misguided since their strategies were different. Ilmanen takes you through the different components of the fund in his presentation(s) and they don't all work at once or fail at once usually. There can always be that unknown of course, just as with any fund including total equities.

I don't know the future. Neither does HomerJ or longinvest, etc.
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Re: QSPIX - thoughts on interesting fund

Post by randomguy » Tue Aug 18, 2015 7:45 am

afan wrote:
HomerJ wrote: The real risk is a fat-tail event, which has not shown up yet.

...
I still don't think you have any idea how much risk you're actually taking though.


Those are the points. Until you have enough real world data, you don't know the return distribution of this strategy, even if it were static. Since they promise it will change, you likely never will know the return distribution.

It is possible that this really does maintain returns while reducing risk. But until tested out of sample, and long enough for the unlikely events to occur, no one knows.

My skepticism is based on what happens to most brilliant investing ideas. They fade as they fail. This could be the real thing. Ten-20 years of stable implementation and we may know. Before that, it is gambling on being lucky enough to have picked a winner. I don't like negative expected return/high positive skew bets enough to be a gambler. But each to their own.


And in 10-20 years when it is sucessful, do you invest or do you go "now that everyone knows about it, the premiums will be grazed away"? How many people here refuse to tilt towards small value despite the 90 years of outperformance? And yes picking QSPIX is gambling. So is investing in the stock market. The hope is that investing is either is an EV+ bet.

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Re: QSPIX - thoughts on interesting fund

Post by afan » Tue Aug 18, 2015 9:00 am

randomguy wrote:And in 10-20 years when it is sucessful, do you invest or do you go "now that everyone knows about it, the premiums will be grazed away"?


Probably invest. If it is a real finding, I would not worry too much about it being grazed over. Of course, if the apparent premium were steadily declining, over that period, then I might figure it was headed to zero.

randomguy wrote: How many people here refuse to tilt towards small value despite the 90 years of outperformance? And yes picking QSPIX is gambling. So is investing in the stock market. The hope is that investing is either is an EV+ bet.


I refuse to tilt to small value, not because I discount a long history, but because I interpret that history differently. As best I can tell, it is not producing any excess risk adjusted return. It is not even clear that it does this when risk is measured only as variance. It clearly does not do this when skewness is included in the risk measure.

As I indicated, I THINK my risk preferences weight negative skew heavily. My other life decisions certainly go that way. It is hard to tell, but I do consistently forgo opportunities for gains if they are accompanied by the risk of big losses.Tilting small value is a good idea for someone who is happier than the average investor with trading somewhat higher expected return for accepting more negatively skewed returns. I don't think that describes me, so I don't do it.

The newer work suggests that small value may be subsumed by other factors anyway.
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Re: QSPIX - thoughts on interesting fund

Post by HomerJ » Tue Aug 18, 2015 10:18 am

lack_ey wrote:You could plop down these exact words in front of most any new fund of this type, because nothing specifically has been addressed about this fund in particular.


Sure, that's the point... Why aren't you investing in every new fund that back-tests extremely well?

We've seen dozens of new funds run by very smart people with "new" strategies that backtested well... And most of them ultimately failed. We've seen them touted on this very board even, and then the fund flops, and the posters slink away.

What makes you guys think THIS fund cannot lose? Mostly I hear people saying "Oh, it's invested in a dozen different things that are not correlated at all... There's no way all dozen things could go down at once!"

We've heard this song and dance before.

Of course, you all may be right... This fund, run by a very smart guy with a very smart team, may have found a formula that cannot lose.

(1) If true, I submit he'd make himself a billionaire without having to charge management fees (Warren Buffet does not charge management fees if you want to invest with him)

(2) I'm surprised none of you are bothered at all by the fact that this SAME guy started a fund that claimed to invest in multiple factors (different factors, but he has already built a fund based on non-correlated factors and back-tested data), and it blew up in 2008 because and Asness said this himself "Something happened I didn't expect to happen". Which means his models didn't cover all possibilities. But THIS fund, run by the same person, you guys are quite sure that all possibilities are covered.

I wouldn't mind you guys touting this fund as an interesting idea (but with a healthy amount of skepticism)...

But just like you hate my cynicism and negativity (based on past experience with hot new funds), I dislike the posts that are really gung-ho over this fund, and who defend it vigorously as a nearly no-lose proposition.

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Re: QSPIX - thoughts on interesting fund

Post by HomerJ » Tue Aug 18, 2015 10:29 am

matjen wrote:HomerJ is just spreading generic FUD. This fund may perform poorly over the long haul because of expenses (ER and trading) but to bang the drum over all this incredible "risk" is misguided.


You're probably right... The incredible "risk" is probably just performing poorly over the long haul because of expenses.

That's a risk we warn against every day on these boards. But when I warn against that same risk for THIS fund, you guys are getting pretty emotional about it, trotting out the same old defenses of high expense funds... "Oh, but this one is so much better that it's WORTH the expenses!"

To compare to LTCM or other funds that AQR/Asness have that had a bad year (and, of course, ignore the long term excellent performance) is misguided since their strategies were different.


Yep... each time a new hot fund comes out, the strategy is different.

Ilmanen takes you through the different components of the fund in his presentation(s) and they don't all work at once or fail at once usually. There can always be that unknown of course, just as with any fund including total equities.


Yes, usually they don't fail all at the same time. Usually.

I don't know the future. Neither does HomerJ or longinvest, etc.


Of course! That's my point! I have never claimed to know the future. No one does. I think the next crisis will be different from all the last crises, and we'll find out that AQR cannot predict the future either.

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Re: QSPIX - thoughts on interesting fund

Post by Maynard F. Speer » Tue Aug 18, 2015 12:22 pm

HomerJ wrote:That's a risk we warn against every day on these boards. But when I warn against that same risk for THIS fund, you guys are getting pretty emotional about it, trotting out the same old defenses of high expense funds... "Oh, but this one is so much better that it's WORTH the expenses!"


Fees make sense in context ... If we assume all active funds are eventually doomed to mean revert, and mirror the long-term average market return, then fees become the one really knowable variable in how you invest

But in the context of something not seeking to beat or track a market return, fees may be more representative of the way a strategy's implemented, and have to be weighed up against the results

Renaissance Technologies' 5% management fee, and 44% performance fee, may sound expensive, but in context of how the fund operates and what it's trying to do - not to mention the 40% annual returns it achieves after fees - I don't think anyone in their right mind would turn down an opportunity to invest
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Re: QSPIX - thoughts on interesting fund

Post by HomerJ » Tue Aug 18, 2015 12:58 pm

then fees become the one really knowable variable in how you invest


I believe this is one of the very few things you can control. High fees are a heavy headwind. Most active funds with high expenses perform poorly. Pointing out a few that have done well does not change the fact that MOST active funds with high expenses perform poorly and it's not easy to pick the winners ahead of time.

Just like pointing out a few stocks that have done really well does not change the fact that active stock trading is hard, and not likely to beat an index.

Maynard F. Speer wrote:Renaissance Technologies' 5% management fee, and 44% performance fee, may sound expensive, but in context of how the fund operates and what it's trying to do - not to mention the 40% annual returns it achieves after fees - I don't think anyone in their right mind would turn down an opportunity to invest


Sure, lots of people would go back in time and invest knowing that this fund would return so well.

Now, let's say a NEW fund opens up that charges 5% with 44% performance fees with no track record... But it shows a great back-test story.

Would someone have to be crazy to turn down an opportunity to invest?

Many of your funds have high fees, and do active trading... You are very comfortable with that. You think getting in and out of markets based on valuations is smart and easy and always pays off, and that it is a good idea to pay active management large fees hoping for larger returns.

I respectfully disagree.
Last edited by HomerJ on Tue Aug 18, 2015 1:01 pm, edited 1 time in total.

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Re: QSPIX - thoughts on interesting fund

Post by lack_ey » Tue Aug 18, 2015 12:59 pm

HomerJ wrote:
lack_ey wrote:You could plop down these exact words in front of most any new fund of this type, because nothing specifically has been addressed about this fund in particular.


Sure, that's the point... Why aren't you investing in every new fund that back-tests extremely well?

We've seen dozens of new funds run by very smart people with "new" strategies that backtested well... And most of them ultimately failed. We've seen them touted on this very board even, and then the fund flops, and the posters slink away.

What makes you guys think THIS fund cannot lose? Mostly I hear people saying "Oh, it's invested in a dozen different things that are not correlated at all... There's no way all dozen things could go down at once!"

We've heard this song and dance before.

Of course, you all may be right... This fund, run by a very smart guy with a very smart team, may have found a formula that cannot lose.

(1) If true, I submit he'd make himself a billionaire without having to charge management fees (Warren Buffet does not charge management fees if you want to invest with him)

(2) I'm surprised none of you are bothered at all by the fact that this SAME guy started a fund that claimed to invest in multiple factors (different factors, but he has already built a fund based on non-correlated factors and back-tested data), and it blew up in 2008 because and Asness said this himself "Something happened I didn't expect to happen". Which means his models didn't cover all possibilities. But THIS fund, run by the same person, you guys are quite sure that all possibilities are covered.

I wouldn't mind you guys touting this fund as an interesting idea (but with a healthy amount of skepticism)...

But just like you hate my cynicism and negativity (based on past experience with hot new funds), I dislike the posts that are really gung-ho over this fund, and who defend it vigorously as a nearly no-lose proposition.

I have nothing against cynicism and negativity unless it's not being constructive. Deliberately setting up straw man positions nobody believes like "this fund cannot lose," "no way," "all possibilities are covered," and "no lose" are getting us nowhere. Either reread the posts if you haven't read them properly or do everyone a favor and cut the crap, please.

If there are other mutual funds or ETFs that backtest well* and are based on strategies that have long histories and out-of-sample performance data, I might be interested in those as well. A problem with a number of other funds—for all people complain here about there being too many unknowns and a black box—is that most of them have much lower disclosures and information available about the strategy used. The ones that are more transparent tend to just be long-only tilted equity or bond funds. Like I said, I looked at Vanguard's equity market neutral fund but couldn't much find information on it other than that there was a manager change: not what current management is doing. I looked at AQR's equity market neutral fund, but that overlaps a lot with what the style premia fund is doing. I would rather rely on multiple strategies and asset classes anyway if possible. I took a quick look at every alternatives/long-short ETF and found nothing of interest. Then I checked the multialternatives category for mutual funds on Morningstar and didn't really find anything of interest there either, but that was only on a quick skim.

*And frankly, you know what backtests better than AQR's fund here? The same thing, except with certain asset class/style combinations thrown out and the weightings changed. You can see that some of them had negative or zero Sharpe ratio over the period tested. And some styles did better than others. Maybe the strategy is still overfit to 1990-2013, but it is a lot less overfit than it could be, at the expense of even better backtest results that may or may not translate to future performance out of sample.

The fees are very large, and I would much rather have something similar that's cheaper and would prefer something riskier. But as far as I know, it doesn't exist. Many alts are similarly or even more expensive, and most (unless you count something like REITs) have significantly lower volatility and probably returns and as such are less useful to those with higher equity allocations.

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Re: QSPIX - thoughts on interesting fund

Post by matjen » Tue Aug 18, 2015 1:16 pm

HomerJ wrote:I wouldn't mind you guys touting this fund as an interesting idea (but with a healthy amount of skepticism)...

But just like you hate my cynicism and negativity (based on past experience with hot new funds), I dislike the posts that are really gung-ho over this fund, and who defend it vigorously as a nearly no-lose proposition.


Actually I hate misrepresentation, straw man arguments, and false comparisons. Who the heck says QSPIX is "a nearly no-lose proposition?" Lack_ey has gone to pains to not say this. I don't say it. Grap doesn't say it. tarheel doesn't say it. Larry Swedroe doesn't say that. We generally say it intrigues us, is worth a small slice of our portfolios, has absolutely performed to do date and looks good in past data which is of less use of course.

We don't compare it to the performance of Total US Stock which is about as fair as comparing Total US Stock to Apple or something. We don't deny that the fund could have a bad year or two or not perform as well as we hope. We don't compare it to a fund Asness ran 20 years ago that had a bad year but had great long term returns or another AQR fund with different strategies that also had a bad year but great overall performance. etc. We don't make a silly argument that another darn fund being down a fair amount in a once in a generation down market is failure when the overall, long term performance is fine. Vanguard had down funds as well if I recall correctly. Vanguard has had many funds that have changed their managers, their strategies, and their portfolios. That doesn't make VTI or VT any less wonderful.

The sad part is that you and a few others rely on such lame arguments when the two simple arguments about expenses and a tad complex are perfectly fine. It's just that the real world performance is fantastic so you can't rely on that for now so you muddy the waters with FUD...cuz you you are emotionally invested in "winning" a silly discussion.

I'm literally "invested" in QSPIX but not especially emotional with it. I am wealthier with it though. :mrgreen:

EDIT: Looks like Lack_ey beat me to the punch. :-) His post is much better per usual.
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Maynard F. Speer
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Re: QSPIX - thoughts on interesting fund

Post by Maynard F. Speer » Tue Aug 18, 2015 1:55 pm

HomerJ wrote:
then fees become the one really knowable variable in how you invest


I believe this is one of the very few things you can control. High fees are a heavy headwind. Most active funds with high expenses perform poorly. Pointing out a few that have done well does not change the fact that MOST active funds with high expenses perform poorly and it's not easy to pick the winners ahead of time.


Obviously fees make a difference over long periods - when their effects compound .. The difference between active and passive might only be 0.5% a year - often a far smaller impact than your chosen stocks/bonds allocation - so it's often a light headwind, but one that can mount up

On the other hand I'd suggest valuations are a much stronger headwind in the medium-term, albeit a noisier one

Image


Sure, lots of people would go back in time and invest knowing that this fund would return so well.

Now, let's say a NEW fund opens up that charges 5% with 44% performance fees with no track record... But it shows a great back-test story.

Would someone have to be crazy to turn down an opportunity to invest?


Well no, I don't mindlessly follow anything that backtests ... But if Jim Simons launched a UK version of RenTech, would soft-close at a manageable size, and used tried and tested factors/algorithms, I'd be happy to invest

Remember there is an acknowledged "free lunch" in diversification - that is: you don't have to "beat the market" (whatever that means) to create something that can radically improve absolute and risk-adjusted returns
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Re: QSPIX - thoughts on interesting fund

Post by HomerJ » Tue Aug 18, 2015 2:03 pm

matjen wrote:We don't compare it to a fund Asness ran 20 years ago that had a bad year but had great long term returns or another AQR fund with different strategies that also had a bad year but great overall performance. etc. We don't make a silly argument that another darn fund being down a fair amount in a once in a generation down market is failure when the overall, long term performance is fine.


You misunderstand my point... Or maybe I misunderstand...

I thought the whole reason you guys want to invest in this is because supposedly it doesn't correlate well with the stock market. It's not the fact that Asness's other fund went down a bunch in 2007-2008; lots of funds went down during that period. It's the fact that it wasn't supposed to be correlated with the stock market, and yet when the market crashed, his Absolute Fund also crashed.

In fact, Asness has a terrible time with unexpected events.

Soon after launching in 1998, AQR hit a stretch of losses. Its value-oriented strategies suffered amid the dot-com bubble, when expensive stocks rallied while old-world, cheap stocks struggled. The firm was just a few months from shutting down.


Few months from shutting down?

He built his returns on the idea that markets for stocks, bonds, currencies and other securities could be irrational for a period of time but always came back to normal. By making lots of small bets, it could produce profits no matter which way the markets moved. But last year's (2008) turmoil hurt AQR's complex trading strategy. Mr. Asness, 42 years old, has seen a number of changes over his long career managing money. But he had never seen a market quite like the one that pounded his hedge fund in the past year and a half.


He doesn't have a very good track record of non-correlation to the stock market. His last fund also was set up to "produce profits no matter which way the markets moved", but it didn't work.

The sad part is that you and a few others rely on such lame arguments when the two simple arguments about expenses and a tad complex are perfectly fine.


My apologies... Expenses and very complex are the arguments I was trying to make.

It's just that the real world performance is fantastic so you can't rely on that for now so you muddy the waters with FUD...cuz you you are emotionally invested in "winning" a silly discussion.


I truly apologize for any of my "strawman" arguments. You are correct that no one here has said this is a "no-lose" bet, and I was wrong to say that.

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Re: QSPIX - thoughts on interesting fund

Post by grap0013 » Tue Aug 18, 2015 2:04 pm

matjen wrote:
Actually I hate misrepresentation, straw man arguments, and false comparisons. Who the heck says QSPIX is "a nearly no-lose proposition?" Lack_ey has gone to pains to not say this. I don't say it. Grap doesn't say it. tarheel doesn't say it. Larry Swedroe doesn't say that. We generally say it intrigues us, is worth a small slice of our portfolios, has absolutely performed to do date and looks good in past data which is of less use of course.


Just wait until I put 20% into this puppy and it outperforms even more! :shock: I'll have to start http://www.Asnessheads.org. My guess is that it will not be a non-profit site! :twisted:

p.s. Thanks for listing me before Larry Swedroe. He only has 3% QSPIX while I have 10% (and climbing due to recent market gains). If LS wants to be listed in front of me in these discussions he needs to anty up and increase his allocation!

Hopefully nobody takes this post too seriously. Just trying to lighten the mood a little. :sharebeer
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Re: QSPIX - thoughts on interesting fund

Post by HomerJ » Tue Aug 18, 2015 2:13 pm

Maynard F. Speer wrote:
HomerJ wrote:
then fees become the one really knowable variable in how you invest


I believe this is one of the very few things you can control. High fees are a heavy headwind. Most active funds with high expenses perform poorly. Pointing out a few that have done well does not change the fact that MOST active funds with high expenses perform poorly and it's not easy to pick the winners ahead of time.


Obviously fees make a difference over long periods - when their effects compound .. The difference between active and passive might only be 0.5% a year - often a far smaller impact than your chosen stocks/bonds allocation - so it's often a light headwind, but one that can mount up

On the other hand I'd suggest valuations are a much stronger headwind in the medium-term, albeit a noisier one

Image


I disagree... That chart shows what? Next-year returns based on CAPE? Or the next 10-year returns based on CAPE?

Show me a chart of 30-year returns correlated to CAPE and watch that graph smooth out. Over the long-term, valuations matter far less than paying high expenses year in and year out.

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Re: QSPIX - thoughts on interesting fund

Post by Maynard F. Speer » Tue Aug 18, 2015 2:31 pm

HomerJ wrote:I disagree... That chart shows what? Next-year returns based on CAPE? Or the next 10-year returns based on CAPE?

Show me a chart of 30-year returns correlated to CAPE and watch that graph smooth out. Over the long-term, valuations matter far less than paying high expenses year in and year out.


I believe the chart shows 15 year returns

But of course the concept is based on long-term mean reversion, so there is an optimal time horizon ... So if you were going to base investing decisions on valuations, you might want to take profits from overvalued regions every so often (perhaps every 10 years) and move them into cheaper regions .. as Vanguard has recently done with its retirement funds

Image
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Re: QSPIX - thoughts on interesting fund

Post by lack_ey » Tue Aug 18, 2015 3:05 pm

HomerJ wrote:
matjen wrote:We don't compare it to a fund Asness ran 20 years ago that had a bad year but had great long term returns or another AQR fund with different strategies that also had a bad year but great overall performance. etc. We don't make a silly argument that another darn fund being down a fair amount in a once in a generation down market is failure when the overall, long term performance is fine.


You misunderstand my point... Or maybe I misunderstand...

I thought the whole reason you guys want to invest in this is because supposedly it doesn't correlate well with the stock market. It's not the fact that Asness's other fund went down a bunch in 2007-2008; lots of funds went down during that period. It's the fact that it wasn't supposed to be correlated with the stock market, and yet when the market crashed, his Absolute Fund also crashed.

In fact, Asness has a terrible time with unexpected events.

Soon after launching in 1998, AQR hit a stretch of losses. Its value-oriented strategies suffered amid the dot-com bubble, when expensive stocks rallied while old-world, cheap stocks struggled. The firm was just a few months from shutting down.


Few months from shutting down?

He built his returns on the idea that markets for stocks, bonds, currencies and other securities could be irrational for a period of time but always came back to normal. By making lots of small bets, it could produce profits no matter which way the markets moved. But last year's (2008) turmoil hurt AQR's complex trading strategy. Mr. Asness, 42 years old, has seen a number of changes over his long career managing money. But he had never seen a market quite like the one that pounded his hedge fund in the past year and a half.


He doesn't have a very good track record of non-correlation to the stock market. His last fund also was set up to "produce profits no matter which way the markets moved", but it didn't work.[...]

So yes, the "unexpected" event here is that growth stocks kept surging for a bit longer. Anybody with a probabilistic mindset would acknowledge that that could happen. In the end, it certainly paid off to be value investing then.

In any case, anyone following a long-short value strategy took big losses in the run-up. The fund being close to closing has to do with the patience and lack thereof of the investors as is not really indicative of the strategy itself. Nobody's under the illusion that anything AQR tries or publishes makes money all the time or even a large majority of the time. There will be losses.

It is apparent that Asness and other quants have troubles with unexpected events and the kind of environments that have not been seen historically but could well happen. This doesn't mean that most of the time, the markets are behaving in this fashion. It doesn't really matter much to me what Asness says (which may or may not be what he thinks, though personally I'm not big on conspiracy theories) or expects, just if I might be able to get something useful out of something. To me, you have to look at if there is still any residual benefit after accounting for bumps both foreseen and unforeseen. As pointed out many times already, nobody makes a new fund based on a strategy that backtests poorly in general and in the last crisis so the fact that nothing bad happens in the backtest is to be expected and doesn't tell us much.

I think it is fairly clear that this strategy and similar long-short implementations shouldn't correlate much with the markets under most conditions, based on theory and then live trading data for different funds. As for equity market crashes, I suspect that this fund will do okay in some of them and perhaps not in others, with the likelihood of a bad outcome and correlation on the way down probably more likely than theory might suggest (and recall that theory and practice are already pretty clear on currency carry, one of the strategies here albeit in a small capacity, frequently tanking in crises). But I also think that the likelihood of as big a drop as previously mentioned examples of LTCM (sigh) and AQR's Absolute Return are small because of the lower leverage and diversity of underlying strategies that have histories of not all blowing up together. We'll see double-digit losses, sure, and if the fund lasts a long time, probably worse than anything in the backtest, but 50% down would be pretty surprising to me though possible.

But low correlation is useful outside of just bear markets, as I've mentioned in previous recent posts. If equities are sideways or down some, there are plenty of opportunities for markets to chug along like normal and some alternative strategies to outperform in these, with the obvious caveat that many alternative strategies will instead underperform. If long-term trend growth is lower than everybody expects, this might actually happen for a long period of time. If things are as good as many expect or want to believe, we'll all be just fine and I can live with having invested some money in dead weight that didn't contribute much or not as much as equities, which is where most of my money is.

There are assets better suited for bear markets, like bonds and cash, which of course I have too. I'd probably also have a small allocation of CCFs but I don't have the tax-advantaged space.

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Re: QSPIX - thoughts on interesting fund

Post by matjen » Tue Aug 18, 2015 5:21 pm

^+1
Though I will add that AQR having difficulty during the tech bubble and perhaps being close to closing shop is not a likely scenario anymore. Too lazy to do the research but AQR was brand new in the late 90s. Probably 10-50 times larger now.

Grap, I am going to have to buy the Asnessheads.com domain! :D

On a more serious note, if I had to pick two people to discuss investing it would be Asness and Bogle. They are both exemplary at getting across their ideas on TV.
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Re: QSPIX - thoughts on interesting fund

Post by tarheel » Wed Aug 19, 2015 5:37 am

grap0013 wrote:
matjen wrote:
Actually I hate misrepresentation, straw man arguments, and false comparisons. Who the heck says QSPIX is "a nearly no-lose proposition?" Lack_ey has gone to pains to not say this. I don't say it. Grap doesn't say it. tarheel doesn't say it. Larry Swedroe doesn't say that. We generally say it intrigues us, is worth a small slice of our portfolios, has absolutely performed to do date and looks good in past data which is of less use of course.


Just wait until I put 20% into this puppy and it outperforms even more! :shock: I'll have to start http://www.Asnessheads.org. My guess is that it will not be a non-profit site! :twisted:

p.s. Thanks for listing me before Larry Swedroe. He only has 3% QSPIX while I have 10% (and climbing due to recent market gains). If LS wants to be listed in front of me in these discussions he needs to anty up and increase his allocation!

Hopefully nobody takes this post too seriously. Just trying to lighten the mood a little. :sharebeer


10%! Darn it grap0013 I thought I was the QSPIX king with 7.5%! I'll have to up my game! :mrgreen:

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Re: QSPIX - thoughts on interesting fund

Post by matjen » Wed Aug 19, 2015 9:32 am

tarheel wrote:10%! Darn it grap0013 I thought I was the QSPIX king with 7.5%! I'll have to up my game! :mrgreen:


I upped my position a bit a month or so ago. I was at 4.x% and wanted to get to an even 5% which is where I am now. Will hang out here most likely but 10% is possible down the road. I think that could be my upper limit.
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Re: QSPIX - thoughts on interesting fund

Post by grap0013 » Wed Aug 19, 2015 12:54 pm

matjen wrote:
tarheel wrote:10%! Darn it grap0013 I thought I was the QSPIX king with 7.5%! I'll have to up my game! :mrgreen:


I upped my position a bit a month or so ago. I was at 4.x% and wanted to get to an even 5% which is where I am now. Will hang out here most likely but 10% is possible down the road. I think that could be my upper limit.


I'm sitting tight at 10% for now with 20% being my upper bound. If it can produce 4% real returns with low correlation for a couple more years I'm in at 20%.

Plus I don't like my current 45:22.5:22.5:10 allocation. 40:20:20:20 I think will allow me to stay the course better. :)
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