QSPIX - thoughts on interesting fund

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larryswedroe
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Re: QSPIX - thoughts on interesting fund

Postby larryswedroe » Sun Sep 13, 2015 10:08 pm

Backpacker, Sorry but you have it wrong, there are those that KNOW what is going on and those that don't, but think they do. Big difference.
And just to clarify I confirmed that there is no active management in the way I have described (meaning no human judgments like at LTCM) all positions are strategic, there is no tactical allocation which would be active management.
Larry

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Re: QSPIX - thoughts on interesting fund

Postby lack_ey » Sun Sep 13, 2015 11:06 pm

Larry, this is what I've read of the docs:

The very basic fact sheet says
Style agreement - Allows for the risk levels of asset classes to vary depending on the degree of agreement across styles


The annual report says
The Fund’s portfolio construction approach is to be diversified with a baseline risk weighting that is balanced across styles and asset groups, taking into consideration liquidity and breadth among other dimensions of risk. Small tactical tilts are implemented around the strategic risk allocation when strategies are conditionally attractive or unattractive. Because the Fund trades in these markets daily and all of the strategies are managed in one portfolio, it can stay disciplined about rebalancing to strategic weights, stay nimble by taking advantage of tactical opportunities and also provide efficient exposure by netting positions and transactions costs.[emphasis added]


The prospectus says
The Adviser will use quantitative and qualitative methods to assess the level of risk (i.e., volatility of return) for the Fund. The
Adviser expects the Fund’s NAV over short-term periods to be volatile because of the significant use of Instruments that have a leveraging effect.
Volatility is a statistical measurement of the dispersion of returns of a security or fund or index, as measured by the annualized standard deviation of its returns. Higher volatility generally indicates higher risk. The Adviser, on average, will target an annualized volatility
level for the Fund of 10%. The Adviser expects that the Fund’s targeted annualized forecasted volatility will typically range between 8% and 12%; however, the actual or realized volatility level for longer or shorter periods may be materially higher or lower depending on market conditions. Actual or realized volatility can and will differ from the forecasted or target volatility described above.[emphasis added]


I have also checked the fund website to see the risk allocation by asset class and noticed it not really following round numbers and changes somewhat.
Image
In addition, at one point I compared these to the description to (basically) the strategy outlined in "Investing with Style," which gives the weights as 30% individual stocks, 10% industries, 15% equity indices, 10% government bonds, 5% interest rate futures, 15% currencies, 15% commodities. They're kind of close but seemingly not exact and far enough off that it doesn't look like the kind of drift one would expect from positions shifting slightly from price movement.

This sounds like more than just constant volatility targeting. Maybe not? I know docs are full of legal wiggle room, but what else is going on here? Are asset class weights changing simply in order to preserve style weightings, or something like that? Or are they performing mild tactical tilts as advertised? Personally, I would prefer asset class and style weightings to be able to change somewhat based on the what the numbers say.


This is in contradiction to
larryswedroe wrote:And as I noted the leverage is "actively" managed but not in way most think of the term. They don't change leverage based on someone's views but in response to changes in volatility, to manage the fund so the vol stays at 10% (so lowering leverage when vol rises, reducing risks, and vice versa).
But the fact is the fund maintains the same allocations to each of the factors and the same percentages in each of the asset classes in each of the factors, not changing them based on someone's judgment.



I don't really care if the weightings are adjusted by hand or by the algorithm. I just want to clarify and understand what ends up happening. Do they or don't they? Just checking. Thanks.

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Re: QSPIX - thoughts on interesting fund

Postby larryswedroe » Mon Sep 14, 2015 7:51 am

Lackey
As I explained many things are written into prospectuses to give freedom of action in unusual situations--the lawyers drive these things

Now perhaps this is what they are referring to, though it has nothing to do with attractive or not or human views. The risk weighting to the different styles is strategic, the capital allocation can vary in order to maintain the risk weighting equal to their targets, keeping in mind they target the volatility at 10%.

The target allocations are as follows: Equity within and across industries, 40%, equity indices 20%, bonds 1%, interest rates 4%, currencies 15% and commodities 10%.

They are very clear in their presentations that they implement the policies in a transparent way with a clearly defined process and strategy and it doesn't make tactical bets (active management)

I hope this clears it up. You have to remember that prospectuses often don't reflect what is going on as they are written to prevent having to amend them often. If you read DFA's prospectuses you can find things they never intend to do also.

What you have to do is perform the due diligence and keep performing it over time to make sure that the firms do what they say they will do, and AQR does just that, keeping investors fully informed through the attribution analysis done quarterly.

Now with that said the fund is more complex than most others, because they target volatility which requires them to actively adjust the positions as volatility changes so they keep their target/strategic allocations and equal risk weighting. But those are systematic and transparent actions. Again the firm has in past delivered on what it says it will.

Larry
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Re: QSPIX - thoughts on interesting fund

Postby backpacker » Mon Sep 14, 2015 8:21 am

larryswedroe wrote:
backpacker wrote:This confirms my view that no one knows what this fund is doing. We can't even figure whether or not the style weightings are actively managed! :oops:
Backpacker, Sorry but you have it wrong, there are those that KNOW what is going on...


Well, I sure hope that someone in the inner circle knows the deep secrets of the AQR style premia alternate fund. The question is whether the fund's strategy is (a) formulaic and (b) transparent enough for a motivative group of potential investors to clearly understand the operation of the fund using public documentation.

Some of us don't like betting our retirement on "I'm BFFs with Cliff Asness and he says everything is hunky-dory."

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Re: QSPIX - thoughts on interesting fund

Postby larryswedroe » Mon Sep 14, 2015 8:46 am

backpacker
Let me add this point to further clarify

The strategic weightings are as follows 34% - value, 34% momentum, 14% carry and 18% defensive. These weights are static, and we do not overweight or underweight the styles. Ideally they would prefer to have 25% risk allocation (equal weight) to each of the four styles, but since two of them(carry and defensive) are not applied as broadly as value and momentum, they receive less weighting.

Again, there are many who know what is going on, they are totally transparent. And they report regularly. IMO it's a situation where the complexity (while transparent) creates some issues in terms of understanding.

But anyone (at least any advisor) should know exactly what is going on.

And of course no one should bet their retirements simply on what someone says, that's what due diligence is for, and it's not just one time, but ongoing.


Larry
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Re: QSPIX - thoughts on interesting fund

Postby grap0013 » Mon Sep 14, 2015 8:48 am

Kudos to Larry for having more patience than most people I know.

QSPIX is formulaic and that makes it a passive strategy by removing the human decision making aspect of it. If you think Larry is lying or you think the fund is all of a sudden gonna go hog wild and do something entirely different and lose you a lot of money then it is not for you.
There are no guarantees, only probabilities.

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Re: QSPIX - thoughts on interesting fund

Postby lack_ey » Mon Sep 14, 2015 9:22 am

Regardless, I don't think any mild or even moderate apparently nonexistent (other than for volatility targeting) shifting in style or asset class weightings would make that much of a difference long term.

If the strategies are not profitable in the long run with a static allocation, you would have a hell of a time getting the fund to make money no matter what you do. And if they are profitable net of costs, there would need to be extraordinarily bad market timing (via changes in exposures from volatility) to make the composite not work, for example being X invested in value when value is doing terribly and then switching to 0.6X because of volatility targeting to exactly catch a period where value rallies, in order to underperform value in the long term by enough to make it negative. And doing that over and over again for all the styles somehow.

As described, the volatility targeting, which is made clear enough, is mostly a risk management procedure, and one most especially useful for taming something like momentum on the short side. You don't want to ride in a dollar-static exposure when shorting financials in 2009, for example. Volatility targeting to limit both upside and downside when things get crazy makes sense.


The "confusion" has more to do with the transparency from the perspective of the non-intended audience, i.e. not advisers, institutions. I don't see how an individual is supposed to read the things I laid out and guess that they're not actually doing any of the things listed, which all in theory sound sensible enough. The words are along the lines of "small tactical tilts are implemented" rather than "may be" or "can" or just another phrasing that sounds less like apparent falsehood. This is a whole other level from prospectuses listing "at least 80%" of securities being XYZ and the usual legal-inspired fudge words, where it is understood that usually it's going to be closer to 100%*. I've looked through some DFA docs—through only briefly, not in detail because of retail availability without an adviser—and never seen anything to this level.

*that said, I've looked up an active TIPS fund from somebody on Morningstar before and seen literally 80% invested in TIPS and the rest in nominal bonds, so you never know...


P.S. would some of you really call a wide range of algorithmic trading strategies keeping a certain strategic exposure as passive? Does this include many HFT firms? A pure quant fund? Regardless of what the "correct" categorization is, if you're in disagreement with a lot of other people as to the definitions, using certain terms invites confusion.

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Re: QSPIX - thoughts on interesting fund

Postby Angst » Mon Sep 14, 2015 10:17 am

lack_ey wrote:Larry, this is what I've read of the docs:
[snip...]

The annual report says
The Fund’s portfolio construction approach is to be diversified with a baseline risk weighting that is balanced across styles and asset groups, taking into consideration liquidity and breadth among other dimensions of risk. Small tactical tilts are implemented around the strategic risk allocation when strategies are conditionally attractive or unattractive. Because the Fund trades in these markets daily and all of the strategies are managed in one portfolio, it can stay disciplined about rebalancing to strategic weights, stay nimble by taking advantage of tactical opportunities and also provide efficient exposure by netting positions and transactions costs.[emphasis added]


Just to be precise, it wasn't in the prospectus where lack_ey identified AQR's mentioning the use of the "tactical" vs "strategic", it was in the annual report. [emphasis expanded upon]

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Re: QSPIX - thoughts on interesting fund

Postby Biffer » Mon Sep 14, 2015 10:28 am

larryswedroe wrote:What everyone needs to understand is that prospectuses all are written to address the POTENTIAL for unusual situations that MIGHT POSSIBLY occur and can literally not reflect anything the fund intends to do.

larryswedroe wrote:You have to remember that prospectuses often don't reflect what is going on as they are written to prevent having to amend them often. If you read DFA's prospectuses you can find things they never intend to do also.

larryswedroe wrote:biffer
... as I stated above most investors don't understand that prospectuses are NOT written to what the fund intends to do and how it will be run, but to account for any possibility that MIGHT occur so the managers can take appropriate action without being in violation of the prospectus and thus liable to lawsuits.

Larry, I can’t speak for most investors, but I for one am surprised to hear that:
  • "prospectuses are NOT written to what the fund intends to do and how it will be run”
  • "prospectuses often don't reflect what is going on...", and
  • a prospectus “can literally not reflect anything the fund intends to do”
No doubt fund prospectuses are written to give the managers flexibility to deal with various circumstances that may arise. But are you suggesting that when a prospectus indicates that the fund manager does (present tense) something, it might mean only that the fund manager one day might do that something (e.g., only in "unusual situations that might possibly occur")?

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Re: QSPIX - thoughts on interesting fund

Postby lack_ey » Mon Sep 14, 2015 10:42 am

Angst wrote:
lack_ey wrote:Larry, this is what I've read of the docs:
[snip...]

The annual report says
The Fund’s portfolio construction approach is to be diversified with a baseline risk weighting that is balanced across styles and asset groups, taking into consideration liquidity and breadth among other dimensions of risk. Small tactical tilts are implemented around the strategic risk allocation when strategies are conditionally attractive or unattractive. Because the Fund trades in these markets daily and all of the strategies are managed in one portfolio, it can stay disciplined about rebalancing to strategic weights, stay nimble by taking advantage of tactical opportunities and also provide efficient exposure by netting positions and transactions costs.[emphasis added]


Just to be precise, it wasn't in the prospectus where lack_ey identified AQR's mentioning the use of the "tactical" vs "strategic", it was in the annual report. [emphasis expanded upon]

I looked around some more and found what I was looking for, because I know I'd read some of this somewhere.

From the 2013 annual report (though this is early on; inception was October 2013... maybe the procedure now is different?)
http://www.sec.gov/Archives/edgar/data/ ... c644649_11
Tactical Positioning: As of December 31, 2013, aggregate tactical risk allocation for the Fund was at 84% of the strategic 10% target. Aggregate tactical positioning is a function of individual strategies rather than a singular aggregate view, and as of quarter-end, five of the six asset groups traded were tactically underweight, although the commodities strategy was very close to a neutral weight at 98% of strategic risk. Interest rates and currencies are the assets that are most underweight, each below 50% of strategic risk. In each case the tactical attractiveness of asset groups is determined by alignment of views among the four styles traded. The stock strategy is tactically neutral relative to strategic risk weight and thus the only asset group not underweight.

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Re: QSPIX - thoughts on interesting fund

Postby larryswedroe » Mon Sep 14, 2015 1:07 pm

Biffer
Unfortunately the lawyers in effect make the people write the prospectuses in such a way that in many cases they are misleading, but that's the way our laws work---if you don't include broad flexibility then every time something unusual comes up you have to go to board to get approval to change prospectus and it could mean big problems in managing the fund, causing losses to shareholders. Just the way it is.
Larry

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Re: QSPIX - thoughts on interesting fund

Postby lack_ey » Mon Sep 14, 2015 2:39 pm

Last time I check on this, I promise.

larryswedroe wrote:Just to be clear
If AQR was shifting between weights on factors and which asset classes it was using that would be active, but it doesn't do any of those type things
So I personally consider it passive, being systematic in implementation,
Larry

larryswedroe wrote:The strategic weightings are as follows 34% - value, 34% momentum, 14% carry and 18% defensive. These weights are static, and we do not overweight or underweight the styles. Ideally they would prefer to have 25% risk allocation (equal weight) to each of the four styles, but since two of them(carry and defensive) are not applied as broadly as value and momentum, they receive less weighting.

larryswedroe wrote:Now perhaps this is what they are referring to, though it has nothing to do with attractive or not or human views. The risk weighting to the different styles is strategic, the capital allocation can vary in order to maintain the risk weighting equal to their targets, keeping in mind they target the volatility at 10%.

The target allocations are as follows: Equity within and across industries, 40%, equity indices 20%, bonds 1%, interest rates 4%, currencies 15% and commodities 10%.[presumably there is a typo here and bonds is not at 1%]


But

the 2014 annual report says
http://www.sec.gov/Archives/edgar/data/ ... 8dncsr.htm
The Fund’s portfolio construction approach is to be diversified with a baseline risk weighting that is balanced across styles and asset groups, taking into consideration liquidity and breadth among other dimensions of risk. Small tactical tilts are implemented around the strategic risk allocation when strategies are conditionally attractive or unattractive. Because the Fund trades in these markets daily and all of the strategies are managed in one portfolio, it can stay disciplined about rebalancing to strategic weights, stay nimble by taking advantage of tactical opportunities and also provide efficient exposure by netting positions and transactions costs.[emphasis added]


From the 2013 annual report (though this is early on; inception was October 2013... maybe the procedure now is different?)
http://www.sec.gov/Archives/edgar/data/ ... c644649_11
Tactical Positioning: As of December 31, 2013, aggregate tactical risk allocation for the Fund was at 84% of the strategic 10% target. Aggregate tactical positioning is a function of individual strategies rather than a singular aggregate view, and as of quarter-end, five of the six asset groups traded were tactically underweight, although the commodities strategy was very close to a neutral weight at 98% of strategic risk. Interest rates and currencies are the assets that are most underweight, each below 50% of strategic risk. In each case the tactical attractiveness of asset groups is determined by alignment of views among the four styles traded. The stock strategy is tactically neutral relative to strategic risk weight and thus the only asset group not underweight.[emphasis added]


This is not legal language from a prospectus. I think. In any case, it's not from the prospectus. It's from the docs that I interpret to be descriptions of what the fund actually did, unless they are allowed to make up whatever they want in the annual reports.

(1) Are they lying?
(2) Did an underweighting of 50% (actually more) of "strategic risk" happen by accident and/or will be kept forever?
(3) Am I missing something here?

Or is it that strategic weightings are static but actual (tactical) weightings are not, even beyond drifting between rebalancing periods? That's like having a 60/40 portfolio and allowing tactical (algorithmic) shifts between 50/50 and 70/30 and calling it passive because the target is 60/40 and the long-term strategic goal of 60/40 is maintained even as the actual allocation bounces around deliberately.

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Re: QSPIX - thoughts on interesting fund

Postby larryswedroe » Mon Sep 14, 2015 2:47 pm

This is what I know Lackey
Maybe it's technical use of terms. The actual weights will vary to keep the risk level at the targets, so the actual allocations will vary from the targets as vol changes to keep the risk in each of the factors at target
Larry

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Re: QSPIX - thoughts on interesting fund

Postby packer16 » Mon Sep 14, 2015 2:53 pm

Larry,

If the fund keeps factor exposure constant, how does it determine which asset class to buy/sell in each period (i.e. factor determination across asset classes) as it appears that the asset class weights are changing every period per the excepts from the annual report(s) above?

Packer
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Re: QSPIX - thoughts on interesting fund

Postby larryswedroe » Mon Sep 14, 2015 2:59 pm

Packer, I would assume the focus in to keep volatility at the target and the factor exposures the same so the vol of the asset classes causes them to shift.
Larry

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Re: QSPIX - thoughts on interesting fund

Postby lack_ey » Mon Sep 14, 2015 3:19 pm

I believe most all of their descriptions are in terms of risk weighting, not dollar weighting. The asset class weights for sure are risk and can't be dollar, as the nominal dollar allocation to less volatile assets is greater than the nominal dollar allocation to stocks, for example, yet stocks broadly are the largest risk weighting category.

In the excerpt above from 2013 they mention large deviations from strategic risk weightings for some asset classes ("below 50% of strategic risk"), so this is not about actual (dollar) weightings varying to keep risk levels at targets. This has to be about risk weightings intentionally being off from target, at least at the asset class level.


Presumably, though my interpretations may or may not be wrong, the determination of which asset classes to buy/sell in each period (as packer16 asks above) has to do with what the algorithm finds about what they mention as "style agreement" in each asset class. For example, if in commodities the asset with the highest value score also has high momentum and high carry scores according to the screens, then it may make sense to spend more of the risk budget than usual on commodities, to get more bang for the buck (i.e. higher aggregate loadings per the amount of risk, with 10% standard deviation or so overall being the total target). On the flip side, if the value screen says to go long and short exactly the opposite of what the momentum screen does, maybe it is not worth gaining as much exposure to value and momentum via this particular asset class at the time. This could well be formalized and automated in the algorithm and implemented in a systematic fashion.

But this is not what Larry says so I don't know.

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Re: QSPIX - thoughts on interesting fund

Postby larryswedroe » Mon Sep 14, 2015 4:12 pm

Lackey
You have it right

1. The primarily objective of this strategy is to provide on-going, long-term passive exposure to the four major styles. However, in order to maintain passive exposure to these styles, it requires dynamic or “active” implementation - adjusting positions for changes in vol, price, etc…

2 When there is agreement across multiple styles(ex. A cheap security, is exhibiting strong momentum, and nice defensive characteristics) it will naturally lead the strategy to take more risk – and vice versa – disagreement naturally leads to lower risk, due to conflicting contributions from the styles(value wants to be long, mom wants to be short, etc…)

3. They allow the strategy to take more(when styles are in agreement) or less(when styles are in disagreement) – within certain risk limits(10 vol target is a long term avg., but 8-12% is the range)

4. Each asset group is allowed to take 120% of its targeted allocation. So you have the five asset groups and if all in agreement it could push the vol to 12%.

These are all algorithm driven, not human judgment. The strategies are systematic and transparent. The "active" part in the model is built into the system before the trading starts, not subject to human judgment (these are the issues why the lawyers have the term active in the annual report--want to call that active, I'm okay as long as we agree on what that means

Larry

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Re: QSPIX - thoughts on interesting fund

Postby lack_ey » Mon Sep 14, 2015 4:31 pm

Thanks. I learned a lot and got a lot clarified in this whole exchange (including doing that digging again through some reports on my own, which I wouldn't have started otherwise).

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Re: QSPIX - thoughts on interesting fund

Postby larryswedroe » Mon Sep 14, 2015 5:01 pm

lackey
My pleasure. Obviously not your simple index fund. But to me I use the term passive broadly to mean that fund strategy is implemented in a systematic, replicable and totally transparent manner in liquid securities and is based on the evidence from peer reviewed research that shows persistent, and pervasive evidence of premiums and there is logic explanation (either risk or behavioral, though risk better) for believing the premium will continue.
Of course others have different definition of passive, with some even considering S&P 500 as active since some committee chooses the list, not the top 500 stocks by market cap.
Key is to understand what you mean when you use the term so we are discussing apples and apples
Larry

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Re: QSPIX - thoughts on interesting fund

Postby backpacker » Mon Sep 14, 2015 5:41 pm

larryswedroe wrote: Obviously not your simple index fund. But to me I use the term passive broadly to mean that fund strategy is implemented in a systematic, replicable and totally transparent manner...

There is nothing replicable about this fund. Given enough time and a large enough portfolio, I could fully replicate (say) the RAFI 1000 index by calculating the weightings myself. So a RAFI 1000 index fund is replaceable. Not so QSPIX. No one here has, or could replicate from public information, the algorithms AQR uses to construct this fund.

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Re: QSPIX - thoughts on interesting fund

Postby grok87 » Mon Sep 14, 2015 6:12 pm

backpacker wrote:
larryswedroe wrote: Obviously not your simple index fund. But to me I use the term passive broadly to mean that fund strategy is implemented in a systematic, replicable and totally transparent manner...

There is nothing replicable about this fund. Given enough time and a large enough portfolio, I could fully replicate (say) the RAFI 1000 index by calculating the weightings myself. So a RAFI 1000 index fund is replaceable. Not so QSPIX. No one here has, or could replicate from public information, the algorithms AQR uses to construct this fund.

+1
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Re: QSPIX - thoughts on interesting fund

Postby larryswedroe » Mon Sep 14, 2015 6:25 pm

backpacker (and grok)
You mistake the term replicable, What I mean is that the people running the fund aren't influencing the outcome, meaning whoever was the manager the fund's results would have been the same. Just like we can see what an index fund would have done even before it existed. This is another way to distinguish active vs passive funds. With active you cannot replicate the outcomes, with DFA, Bridgeway, AQR you can come very close (some patient trading of course is going on so could not replicate exactly but any differences should be random and minor)

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Re: QSPIX - thoughts on interesting fund

Postby lack_ey » Mon Sep 14, 2015 6:36 pm

Well, in some sense it is not even clear from general-public disclosures the exact screens being used for each of the styles, much less the low-level security trading and weighting procedure. There are a lot of lower-level details that would need to be disclosed for someone to be able to run a virtually equivalent copy.

For example, some folks in AQR land have some ideas about how best to measure value in stocks. Fund literature mentions buying cheap relative to fundamentals and selling expensive, using measures such as p/e and p/b in equities. No real surprise there. I don't know if they give more details to advisers and institutional investors here. "Investing with Style" (the paper with the 17.4% excess return over cash for the raw, before-costs-and-fees strategy backtest that some have picked on with vague concerns about data mining) effectively uses just p/b in the way suggested in the HML paper, for reference, probably because it is simple and good enough for illustrative purposes. In other writing they suggest that using multiple value measures is a good idea, so I would assume they're doing that for trading live money.

So while I have a reasonable confidence that they are using appropriate measures for screens (this relates to the "why Asness / AQR?" question brought up by some—I think it is reasonable to assume that this is a fund shop with the academic finance chops to execute something of this nature), I have no proof.

But there is enough information to generate some kind of decent approximation that would probably have pretty high correlation to their particular implementation and a lot of similarities. Certainly there are a lot more disclosures here than for most alternatives funds by most shops. On the other hand, almost none of us here invest in *insert typical alternatives fund by randomly selected fund manager* so that may not be a very relevant comparison anyone cares about.

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Re: QSPIX - thoughts on interesting fund

Postby larryswedroe » Mon Sep 14, 2015 6:53 pm

Lackey
Anyone with access to the algorithms would be able to replicate the results. Just like with DFA which sets their buying criteria or Bridgeway
Larry

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Re: QSPIX - thoughts on interesting fund

Postby lack_ey » Mon Sep 14, 2015 7:12 pm

larryswedroe wrote:Lackey
Anyone with access to the algorithms would be able to replicate the results. Just like with DFA which sets their buying criteria or Bridgeway
Larry

Yup, agreed there. It wasn't the sense that backpacker and grok87 originally took the issue of replication, though.

But on second thought I think it is relevant to point out that you could get somewhere in striking distance just based on public disclosures, without even trying to reverse engineer it.

I mean, what's Vanguard's market neutral fund (VMNFX) do, never mind their new liquid alternatives fund (VASFX), or those by pretty much every fund family? Who knows? They basically tell you they have computer models that tell them to buy stuff they think is good and sell stuff they think isn't, with lots of potential criteria and tilts. You wouldn't come close trying to replicate those. You could replicate the RAFI 1000 yourself and get close to a lot of long-only funds based on relatively simple screens, but I think it is rare to find funds outside of long-only stocks and maybe bonds where most of the formula is known.

The market neutral fund is what some here have invested in, directly or through the managed payout fund, so it is not that contrived an example. I don't know if people take these funds seriously into consideration or not, though.

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Re: QSPIX - thoughts on interesting fund

Postby larryswedroe » Mon Sep 14, 2015 7:48 pm

Lackey
All fund families are going to keep their somewhat secret sauce confidential. With Bridgeway they use four value metrics and we don't know the exact weighting but we have confidence they are doing what they are supposed to do. Same with DFA and AQR
Larry

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Re: QSPIX - thoughts on interesting fund

Postby gtwhitegold » Tue Sep 15, 2015 3:17 am

Larry,

I recently read and article about how some hedge funds were profiting from some risk parity funds having to deleverage to reach their target volatility level. Do you feel that this fund is likely to fall prey to such counter trading itself, or is the volatility target broad enough to avoid it?

Allen

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Re: QSPIX - thoughts on interesting fund

Postby larryswedroe » Tue Sep 15, 2015 7:42 am

gtwhitegold
Keep in mind that the fund is a patient trader with strategy of selling/not buying liquidity, using algo programs to trade. It's the buyers of liquidity that get exploited.
Larry

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Re: QSPIX - thoughts on interesting fund

Postby nisiprius » Wed Sep 16, 2015 3:03 pm

larryswedroe wrote:...In our case I assure you that a considerable amount of due diligence was done, including spending time in their trading rooms, watching them execute...
What were you able to observe in the trading room about whether QSPIX is managed according to mechanical rules according to the advisor's ongoing evaluation of investment opportunities?
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Re: QSPIX - thoughts on interesting fund

Postby larryswedroe » Wed Sep 16, 2015 3:23 pm

Nisiprius
Don't know how many times I have to repeat it, but this is last time, there is no manager judgment of investment opportunities taking place---despite what the prospectus says--don't know how many times I have to say the same thing. Either you believe me or you don't.
The algo programs determine the positions based on the targeted allocations and targeted volatilities.
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Re: QSPIX - thoughts on interesting fund

Postby VictoriaF » Wed Sep 16, 2015 3:42 pm

larryswedroe wrote:
nisiprius wrote:
larryswedroe wrote:...In our case I assure you that a considerable amount of due diligence was done, including spending time in their trading rooms, watching them execute...


What were you able to observe in the trading room about whether QSPIX is managed according to mechanical rules according to the advisor's ongoing evaluation of investment opportunities?


Nisiprius
Don't know how many times I have to repeat it, but this is last time, there is no manager judgment of investment opportunities taking place---despite what the prospectus says--don't know how many times I have to say the same thing. Either you believe me or you don't.
The algo programs determine the positions based on the targeted allocations and targeted volatilities.
Larry


I am with Nisiprius. Watching execution is not a valid argument that a fund is properly managed. Prospectus, on the other hand, is the only document that binds fund management.

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Re: QSPIX - thoughts on interesting fund

Postby lack_ey » Wed Sep 16, 2015 3:57 pm

I have to say, I am a little surprised in general at the relative attention and concern expressed at agency and execution, relative to individual underlying style performance persistence and the actual strategy.

Maybe I'm the one focused on the wrong things. Who knows.

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Re: QSPIX - thoughts on interesting fund

Postby nisiprius » Wed Sep 16, 2015 4:00 pm

I have no doubt that Larry Swedroe has the personal access he says he has, heard what says he heard at AQR's presentations, saw what he saw in the trading room, and is a better judge of Cliff Asness' intentions than I am.
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Re: QSPIX - thoughts on interesting fund

Postby Levett » Wed Sep 16, 2015 5:10 pm

Well, here's my recommendation to the moderators in general and Mr. Swedroe, in particular.

Be more respectful of posters.

You advise people not to believe a prospectus. You are in possession of Secret Sauce.

Why not keep it secret? I, for one, don't need it.

I hope I don't have to say this again (assuming the mods don't take aim at me instead of thee).

Lev

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Re: QSPIX - thoughts on interesting fund

Postby larryswedroe » Wed Sep 16, 2015 5:42 pm

Levett
First, no where did I say do not believe a prospectus, just noted that prospectuses are often written so that they give freedom of action for managers that is in shareholder's interests. So one should not automatically take them literally. You have to know the firm and it's management to know whether you should be able to rely on it. So for example, I would venture that Vanguard's funds allow them to use derivatives (such as futures) which makes sense. But that might be interpreted by some that it can be used in negative way. So you perform due diligence and observe behaviors and look at track records to determine if a fund can be relied on to do what it says it will. That is what I said should be done, that is what we do thoroughly before making any decision. But we also understand the issues in writing prospectuses.
Second, fwiw in terms of personal experience I have run trading rooms for two of the largest financial institutions in the world, Citicorp and Prudential.
Third, I don't believe I was disrepectful at all, in fact highly patient in answering questions despite the same issues being raised and answered by me several times and even one poster noting the patience. How many other professionals do you know that would even bother to take the time, with no benefit to themselves?
Fourth your statement about some secret sauce has no basis in fact. Nowhere did I say anything that could even remotely be interpreted that way, and in fact I have stated repeatedly that the AQR fund is systematic and highly transparent in what it does, nor would I recommend any fund that basically said it has a secret sauce, and never have.

And for Victoria, it's not ONLY observing trading but monitoring performance, reviewing the attribution analysis, looking at historical performance of other funds that all should be done to help be confident and one should be persistently vigilant. Even after 20 years of working with DFA we require attribution analysis to monitor the expected random tracking error that happens, making sure it's random and not changes in strategy.
Larry

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Re: QSPIX - thoughts on interesting fund

Postby matjen » Thu Sep 17, 2015 8:17 am

Levett wrote:Well, here's my recommendation to the moderators in general and Mr. Swedroe, in particular.

Be more respectful of posters.

You advise people not to believe a prospectus. You are in possession of Secret Sauce.

Why not keep it secret? I, for one, don't need it.

I hope I don't have to say this again (assuming the mods don't take aim at me instead of thee).

Lev


Well, here's my recommendation to the moderators in general and Levett, in particular.

Don't flagrantly misrepresent what others have repeatedly written.

You advise a participant how to post on a forum. A participant with an incredibly long and valuable history of contributing to said forum. You are in possession of Levett's Rules of Order or Levett's Etiquette and apparently want to share that with us but nothing about QSPIX or its strategies.

Why sound off about Larry's style (regarding perhaps only one of his numerous posts on this single thread after he has been harangued over every word) rather than on the substance of the topic? How about thoughts on AQR's Style premia rather than Larry's style? I, for one, don't need it.

I hope I don't have to say this again (assuming the mods don't take aim at me instead of thee). :annoyed

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Re: QSPIX - thoughts on interesting fund

Postby VictoriaF » Thu Sep 17, 2015 9:34 am

matjen wrote:
Levett wrote:Well, here's my recommendation to the moderators in general and Mr. Swedroe, in particular.

Be more respectful of posters.

You advise people not to believe a prospectus. You are in possession of Secret Sauce.

Why not keep it secret? I, for one, don't need it.

I hope I don't have to say this again (assuming the mods don't take aim at me instead of thee).

Lev


Well, here's my recommendation to the moderators in general and Levett, in particular.

Don't flagrantly misrepresent what others have repeatedly written.

You advise a participant how to post on a forum. A participant with an incredibly long and valuable history of contributing to said forum. You are in possession of Levett's Rules of Order or Levett's Etiquette and apparently want to share that with us but nothing about QSPIX or its strategies.

Why sound off about Larry's style (regarding perhaps only one of his numerous posts on this single thread after he has been harangued over every word) rather than on the substance of the topic? How about thoughts on AQR's Style premia rather than Larry's style? I, for one, don't need it.

I hope I don't have to say this again (assuming the mods don't take aim at me instead of thee). :annoyed

Matjen


Writing repeatedly the same statements does not mean that these statements are correct.

The essence of the Bogleheads investing is using low-cost index funds. QSPIX has the expense ratio of 1.5%, which is outrageous.

Expecting one to read the 700 messages in this thread is unrealistic. The onus is on the promoters of this fund to answer questions as they come and not to defer to prior answers, which may have been in response to questions phrased differently or not satisfactorily answered. I particularly appreciate Nisiprius's questions that get to the heart of the issue.

Let me repeat an earlier statement by Five Scoop from page-1 (time stamp: 06 Jun 2015, 20:36), which summarizes my judgement of this fund:

Five Scoop wrote:Well, the fund does get a lot of attention on the forum. The danger here is that a prominent poster such as Larry Swedroe wrote a piece about this fund a while ago. That, unfortunately, gives it credibility. Then there are threads about articles written by Asness to support the AQR funds and their investing strategies. People seem to lose sight of the fact that Asness may be writing articles supporting his investing strategies in order for people to have a reason to invest in his funds. I think anybody who posts about the merits of these alternative investing strategies is fooling themselves into believing they have a deep understanding of the investing strategy and risks involved with these funds. In reality, this is akin to someone reading about how to perform an appendectomy and believing they are competent to perform the surgery.


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Re: QSPIX - thoughts on interesting fund

Postby matjen » Thu Sep 17, 2015 9:51 am

lack_ey wrote:I have to say, I am a little surprised in general at the relative attention and concern expressed at agency and execution, relative to individual underlying style performance persistence and the actual strategy...


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Re: QSPIX - thoughts on interesting fund

Postby lack_ey » Thu Sep 17, 2015 10:35 am

VictoriaF wrote:Let me repeat an earlier statement by Five Scoop from page-1 (time stamp: 06 Jun 2015, 20:36), which summarizes my judgement of this fund:

Five Scoop wrote:Well, the fund does get a lot of attention on the forum. The danger here is that a prominent poster such as Larry Swedroe wrote a piece about this fund a while ago. That, unfortunately, gives it credibility. Then there are threads about articles written by Asness to support the AQR funds and their investing strategies. People seem to lose sight of the fact that Asness may be writing articles supporting his investing strategies in order for people to have a reason to invest in his funds. I think anybody who posts about the merits of these alternative investing strategies is fooling themselves into believing they have a deep understanding of the investing strategy and risks involved with these funds. In reality, this is akin to someone reading about how to perform an appendectomy and believing they are competent to perform the surgery.


Victoria

I will definitely excuse you because you haven't read the whole thread, but if you had, then I would be sure that you will see that there is a large degree of skepticism and a very high level of awareness from everyone seriously involved that obviously AQR research will present ideas that support AQR investment strategies. It would be borderline condescending to imply that people are losing sight of these things.

When doing research, I
1. Read all the documentation (annual report, prospectus, fact sheet, a few non-public slide decks leaked here or there on the internet) I could find on the fund
2. Read all the papers from AQR relating to the fund strategy and usage, and some related works
3. Read all the articles I could find discussing the fund, including those from Larry
4. Looked over the broad literature (meaning, not from AQR) about the underlying styles
5. Looked through every single alternatives ETF listed in the category
6. Skimmed through the list of multialternatives mutual funds listed by Morningstar and most recommendations in the alternatives space
7. Tried to find more information on the strategy used by competing funds (such as Vanguard's market neutral) and pretty much found nothing
8. Looked at regressions of factor analysis for many alternative funds in the space

In the discussion, I have myself tried to offer as many possible pitfalls and areas of concern as I could think of.

Then I ask every single detractor over and over again to voice specific concerns about the statistical analysis underlying the fund concept, the viability of the fund styles, etc. These tends to be unfortunately light on details.

What matters are underlying exposures and costs*. With a great many funds, you can get largely the same exposures with a passive fund at much lower cost. This is not the case for a whole class of hedged long-short funds.** I've brought this up time and time again, but those bringing up only the cost but not the exposures are missing the point. By this type of reasoning, the low volatility version of the fund (QSLIX, ER = 0.85%) would be preferred. It not only costs less, but uses less leverage, is less volatile, and is less risky! (It also has about half the level of exposures.) Costs in of themselves do not tell the whole story. Neither does absolute dollar level of leverage, or a lot of the other traits discussed at times.

*and of course, if those exposures make sense, and if the fund can execute on what it's trying to do and not explode

**on the other hand, for some styles such as value, there is a good argument to be made about how much and what really gets captured with say a long-only implementation in equities (which tends to be offered at a much cheaper price), which I would expect to have more legs but people aren't even much running with this

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Re: QSPIX - thoughts on interesting fund

Postby larryswedroe » Thu Sep 17, 2015 10:46 am

Victoria
Sorry but I am not promoting anything at all and I personally resent the use of that term. I get no compensation from anyone in return for recommending that someone CONSIDER investing in the fund, and for explaining why I personally have invested my own assets in them as well.

Now if you also think it's realistic for someone, someone with a full time job, to keep repeating the same explanations to the same questions asked over and over again, even if in a somewhat different format, that just isn't realistic, and in the face of what is often antagonistic tones. The burden should be on the person asking the question to see if it has been answered already, not me having to keep repeating the same thing. If they are interested in the subject do the homework. Especially when I get no benefit from doing so, other than the knowledge that I have tried to help people make more informed decisions.

Finally, while you may believe a 1.5% fee is outrageous I obviously don't or I wouldn't invest my own personal assets in the fund, with a significant position. Clearly I would prefer a lower fee, but this is a unique fund, with very limited capacity and AQR is in the profit making business, so like all good capitalists when there is strong demand and limited supply you get to charge a higher fee. Also I would point out that the fee is effectively 0.75% when viewed correctly because you are getting both the long and the short side of the factor exposure, so you have say $1,000 long and $1000 short position for which you are only paying for $1,000 of investments you made, but have $2,000 of exposure. Note most factors get about half the premium from the long side and half from the short. I would add this. One can buy the cheaper version of the fund that costs 0.85%, but that would actually be dumb, because you get half the exposures for more than half the price, better to simply buy half of the more expensive fund. That's a good example of the foolishness of focusing ONLY on costs and not on value added. Yet obviously people have bought the fund, and I tried to help them avoid making that mistake. Which is why one of my favorite expression is millions of people know the price of everything and the value of not much.

I would add that given AQR's history of investor friendly actions, it would not surprise me if at some point in the not too distant future the fund considered a "soft close" (no new investors) as they have done this in the past. If they were solely interested in maxing profits that would not happen yet they have a history of doing so in spaces where there is limited capacity. The fund has gathered a very significant amount of assets, including institutional assets (and obviously they don't consider the fee outrageous either).

Larry
Last edited by larryswedroe on Thu Sep 17, 2015 12:23 pm, edited 1 time in total.

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Re: QSPIX - thoughts on interesting fund

Postby lack_ey » Thu Sep 17, 2015 11:03 am

Larry, now that you mention it here, do you have a sense of what the capacity of the fund is and how much it's moving the markets already? It's at about $1.2B now. What would be getting too large? $2B? $10B?

I've noted (multiple times, as well) that the fund restricts itself to large, more liquid stocks and then the most traded derivatives, and certainly the capacity should be higher than for many more narrow schemes and arbitrages, but there are limits even then.

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Re: QSPIX - thoughts on interesting fund

Postby larryswedroe » Thu Sep 17, 2015 12:22 pm

Lackey
The problem isn't the $1.2b in strategy in mutual funds. The problem is the much greater use by institutional investors. I think the total is perhaps $7b, which is why I think it's at least possible that some change could come in the not too distant future. Have no idea of whether that could be 1 year or 5 or 10. But there is a limit with long-short strategies, much less than with long only (especially if in large caps).

Here's a thought if I were to speculate. IF they decided at some point on a soft close they might come out with a more limited version of the same strategy, so not accessing as many asset classes perhaps, cutting out those where the capacity is more limited. Then might even be a lower fee perhaps (or maybe I'm just doing wishful thinking). Note that AQR fees on long only strategies in large caps like the large cap fund that accesses multi styles is pretty similar to DFA funds, not hedge fund like at all. So they have lower fees where there is greater capacity, like all good capitalists (:-))

Larry

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Re: QSPIX - thoughts on interesting fund

Postby grap0013 » Thu Sep 17, 2015 1:31 pm

Levett wrote:Well, here's my recommendation to the moderators in general and Mr. Swedroe, in particular.

Be more respectful of posters.

You advise people not to believe a prospectus. You are in possession of Secret Sauce.

Why not keep it secret? I, for one, don't need it.

I hope I don't have to say this again (assuming the mods don't take aim at me instead of thee).

Lev


I'm confused....are you saying Larry needs to be more respectful of other posters? This thread has lost its mind. Larry has been a complete professional in this thread showing a ton of respect despite accusations of blatant disbelief in what he is saying. I think more respect needs to be shown towards him rather than the other way around. Larry, I hope this has not been too off putting and you continue to spend time of your own volition contributing to Bogleheads investing knowledge through posts on this website.

Some of the responses in this thread wreak of paranoia and conspiracy theory.

There is some delusion here too: 1.an idiosyncratic belief or impression that is firmly maintained despite being contradicted by what is generally accepted as reality or rational argument, typically a symptom of mental disorder: Like I said, lost its mind.
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Re: QSPIX - thoughts on interesting fund

Postby Day9 » Thu Sep 17, 2015 2:00 pm

grap0013 wrote:I'm confused....are you saying Larry needs to be more respectful of other posters? This thread has lost its mind. Larry has been a complete professional in this thread showing a ton of respect despite accusations of blatant disbelief in what he is saying. I think more respect needs to be shown towards him rather than the other way around. Larry, I hope this has not been too off putting and you continue to spend time of your own volition contributing to Bogleheads investing knowledge through posts on this website. ...


Seconded. I just went through this thread and saw some people calling him a shill in more-or-less words. He always backs up his posts with good arguments and this thread is no exception.
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Re: QSPIX - thoughts on interesting fund

Postby lack_ey » Thu Sep 17, 2015 2:03 pm

larryswedroe wrote:Lackey
The problem isn't the $1.2b in strategy in mutual funds. The problem is the much greater use by institutional investors. I think the total is perhaps $7b, which is why I think it's at least possible that some change could come in the not too distant future. Have no idea of whether that could be 1 year or 5 or 10. But there is a limit with long-short strategies, much less than with long only (especially if in large caps).

Here's a thought if I were to speculate. IF they decided at some point on a soft close they might come out with a more limited version of the same strategy, so not accessing as many asset classes perhaps, cutting out those where the capacity is more limited. Then might even be a lower fee perhaps (or maybe I'm just doing wishful thinking). Note that AQR fees on long only strategies in large caps like the large cap fund that accesses multi styles is pretty similar to DFA funds, not hedge fund like at all. So they have lower fees where there is greater capacity, like all good capitalists (:-))

Larry

Thanks, I forgot about the institutional money there for a sec. Interesting about the levels of participation.

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Re: QSPIX - thoughts on interesting fund

Postby larryswedroe » Thu Sep 17, 2015 5:33 pm

Grap
thanks, what amazes me is the accusations that have no basis in fact and yet when I respond, respectfully, with detailed answers most who asked never say thank you and never apologize for their comments
Larry

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Re: QSPIX - thoughts on interesting fund

Postby nisiprius » Thu Sep 17, 2015 5:45 pm

larryswedroe wrote:Grap
thanks, what amazes me is the accusations that have no basis in fact and yet when I respond, respectfully, with detailed answers most who asked never say thank you and never apologize for their comments
Larry
I've forgotten to thank you, so thank you, Larry, for your many contributions to this forum.

I think there may be a culture gap between the culture of business and those of engineering and academia and that people are talking past each other. In the culture I come from, sharp probing for the evidence behind statements is not regarded as "an accusation." I was inappropriately sharp and I apologize.

I interpret your comments about the trading floor to mean "AQR is a well-run mutual fund company, I have the knowledge and experience to judge that, and I have confidence that they are doing and will continue to do exactly what they say they are doing and will continue to do."
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Re: QSPIX - thoughts on interesting fund

Postby larryswedroe » Thu Sep 17, 2015 6:13 pm

Thanks Nisiprius
And yes, but it's even more than that, as AQR has a good history, just like Vanguard and DFA and Bridgeway, that they do just what they say they will do. On other hand I could cite other fund companies I would not say the same things about. And like I said, AQR provides an incredibly detailed attribution analysis showing the sources of the returns vs what the "model" would have shown.
That's how you keep track by making sure differences over time are random, which are fully expected because they aren't "indexers" with sole goal of replicating an index. They know trading costs matter and they want to be a supplier, not a demander of liquidity. And in fact their analysis shows that the trading costs in the fund have actually been LOWER than they estimated.
That's what patient trading can provide.
I would add that AQR guys also put their money where their mouths are an invest personally in same funds, and there is actually academic evidence that when that happens returns are higher (should be no surprise).

I would be remiss if I did not add that I get many emails over time from people thanking me for helping them over the years. So it's not all one-sided. It's those people that make the time worth while. My time here is simply my way of giving back, or paying it forward. No other reward, at least relative to the time spent (:-)).

You'll note I'm always happy to answer any question that is asked respectfully, and even some that aren't asked that way.
Larry

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Re: QSPIX - thoughts on interesting fund

Postby countmein » Sat Sep 19, 2015 2:39 pm

larryswedroe wrote:I would add that AQR guys also put their money where their mouths are an invest personally in same funds, and there is actually academic evidence that when that happens returns are higher (should be no surprise).


That's interesting; did not know that.

Larry, does it bother you then that nobody at Bridgeway invests in Omni Small Value (save for Montgomery's token allocation)? At least according to the SAI they don't.

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Re: QSPIX - thoughts on interesting fund

Postby nedsaid » Sat Sep 19, 2015 3:05 pm

Larry, I want to thank you for your contributions to this forum. You have been unselfish with your time and have been generous with your knowledge.

Pretty much, you either believe the academic research or you don't. It certainly isn't flawless and researchers no matter how hard they try can't eliminate 100% biases and presuppositions. I have looked at the evidence and gently small/value tilt my portfolio. I believe the academic research because it resonates with my experience as an investor, my knowledge of the markets, and my knowledge of human nature and behavior. If the claims of academic research just came out of left field, I would dismiss it. But it is consistent with what I have learned and experienced from 30 plus years of investing experience.

Skepticism is a good attribute for investors. We need to examine the claims that people, particularly salespersons make. But we can't be so skeptical that we don't believe anything. We also should be prepared to agree to disagree.

I believe in factor investing but I don't have a big quarrel with those who want to invest with a 3-5 fund portfolio in the broad index funds. If you are strictly a market-cap weighted index fund investor, God love you. Wonderful. I have endorsed both a small/value tilting strategy and the 3-5 fund portfolio for new investors. It depends on your opinion of the academic research.

Sometimes, folks get beaten up with foam rubber hammers on this forum. It is all in good fun as I have been hammered for my comments on dividends and on my rather relaxed attitude towards rebalancing. Larry has taken a lot of heat here but he is a big boy and can handle it. I for one am glad that he chooses to post here. Thanks again Larry.
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