QSPIX - thoughts on interesting fund

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Re: QSPIX - thoughts on interesting fund

Postby LadyGeek » Fri Sep 25, 2015 9:37 pm

lack_ey wrote:Right, for any given allocation, the more leverage at any given time, the higher the volatility. To try to keep volatility more consistent (primarily), the leverage is deliberately adaptive for this fund.

In theory you could do volatility targeting for any portfolio. For (long-only) stocks and bonds, this would essentially look like some kind of mechanical market timing scheme for shifting AA. If you had a target of 12% annual standard deviation this might be something like 80% stocks/20% bonds at some times, but 60% stocks/40% bonds at others, for example. I don't know if it would be much different over the long run compared with a static allocation. Volatility targeting is generally more seen for long/short funds, where you're scared of spikes in volatility, which could really kill the short positions if the assets zoom back up, and also because such funds are frequently leveraged too.

^^^ That's an interesting perspective, thanks.

There's one more part that I'm still missing. Could someone explain what a style factor is?

From the wiki: Factors (finance), a factor is a common characteristic among a group of assets. Based on the discussion for QSPIX, the factor does not appear to be ones used by the Fama-French three-factor model analysis, which utillize price/book and size (high / low) ratios.

What defines a style factor for QSPIX?
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Re: QSPIX - thoughts on interesting fund

Postby lack_ey » Fri Sep 25, 2015 9:52 pm

Sure, what AQR calls a style (not a style factor) is what basically the rest of the world calls a factor.

As they list:
Value — the tendency for relatively cheap assets to outperform relatively expensive ones

Momentum — the tendency for an asset’s recent relative performance to continue in the future

Carry — the tendency for higher-yielding assets to provide higher returns than lower-yielding assets

Defensive — the tendency for lower-risk and higher-quality assets to generate higher risk-adjusted returns


Value and momentum, and to some degree carry, are commonly cited, well known by those exact words. Defensive is kind of related to low volatility/beta and so on. Vanguard's global minimum volatility fund can be thought of as a long-only implementation of defensive to some degree.

They mean value in the sense of Fama-French value. A couple of AQR's founders, Asness and Liew, were Fama's PhD students. That said, if you look at specifically the measures they're using, for value in equities they use "book-to-price, earnings-to-price, forecasted earnings-to-price, cash flow from operations-to-enterprise value (defined as market capitalization plus debt plus preferred equity minus cash) and sales-to-enterprise value" according to Larry Swedroe. Traditionally Fama-French value is just book-to-price.

But whereas usually people just think of value in equities, they're doing those four styles across multiple asset classes.

You can find a little bit more precise definitions of what they mean by those in each asset class in sections 2-3 here:
https://www.aqr.com/~/media/files/paper ... -style.pdf

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Re: QSPIX - thoughts on interesting fund

Postby LadyGeek » Fri Sep 25, 2015 10:11 pm

Again, thanks. I was missing a large part of the discussion because I didn't have a good understanding of the underlying concepts. It's not just financial theory, but how the terminology is used.

In this case, I didn't realize that style and factor where the same thing. The paper is a very good tutorial.

Now, I can appreciate why this thread has 903 posts to date.

(For those interested in learning the very basics of investing, see: Comparing investments and focus on cash flow diagrams and the financial variables. It's a skill worth learning, much more so than than what's discussed in this thread. Get the basics down first.)
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Re: QSPIX - thoughts on interesting fund

Postby gtwhitegold » Sat Sep 26, 2015 3:42 am

Thanks to everyone who has helped to develop this discussion, especially Larry.

For those that were talking about investing in it from the UK, it appears to be available there now.

http://www.morningstar.co.uk/uk/funds/s ... F00000U5T3

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Re: QSPIX - thoughts on interesting fund

Postby grok87 » Sat Sep 26, 2015 3:40 pm

LadyGeek wrote:Could someone please clarify how leverage is used for QSPIX? I'm looking the definition in the wiki: Leverage, but discussions on use of volatility as a multiplier (in this thread) has me confused.
According to the wiki: Leverage = debt/equity

For example, the volatility (statistical spread of returns) of (most) bonds is much lower than high-risk equities. Therefore, bonds have less leverage than high-risk equities.

How does volatility as discussed here apply to the debt/equity ratio?

Update: See next post for clarification of volatility.

Unfortunately leverage is one of those terms that is not used consistently or clearly defined in the financial world.

1) for corporations often leverage means debt/equity

2) for etfs, closed-end funds etc. it can be defined as debt/(debt+equity)
http://www.cefconnect.com/Details/Summa ... Ticker=BBN
(see effective leverage and also structural leverage in the glossary)
http://www.cefconnect.com/Education/GlossaryCEF.aspx#E

sometimes this is done for corporations as well...

3) assuming we stick with just equity as the denominator, the way leverage is talked about can still be a little confusing. let's say a company has $200 M of equity, or a fund garners $200 M of money to invest from investors (which is known as the funds initial NAV). then the fund goes out an borrows money...

a) if it borrows $20 M, then one might say it is 10% levered or has leverage of 10%.

b) if it borrows $200 M, then people don't really say it is 100% levered or that it has leverage of 100% (although it would not be inaccurate to do so). Instead they say it is levered 2:1 or that is is 2x leveraged (2 times leveraged).

c) sometimes funds can be leveraged without directly borrowing. they do this by using futures, forward, derivatives, options, etc.

d) QSPIX pursues a long-short strategy and is currently levered 7:1 or it is 7x leveraged (it is 7 times leveraged). in other words it has either borrowed 6 times its NAV or has effectively done the same thing through derivatives etc.

e) in such situations, sometimes the fund will say it is levered 3.5x per turn. that is for every dollar you give it, it places $7 worth of bets. $3.5 of these are on the long side and $3.5 are on the short side

sorry for the length.
Last edited by grok87 on Sun Sep 27, 2015 6:09 am, edited 1 time in total.
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Re: QSPIX - thoughts on interesting fund

Postby nisiprius » Sat Sep 26, 2015 7:10 pm

This post removed in favor of starting a new thread on the topic of What are the limits, if any, on leverage by mutual funds?
Last edited by nisiprius on Sat Sep 26, 2015 7:58 pm, edited 1 time in total.
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Re: QSPIX - thoughts on interesting fund

Postby lack_ey » Sat Sep 26, 2015 7:33 pm

Through the magic of derivatives, that's how (sarcasm, by the way. I have the same question myself as to the "why" it is allowed through indirect means). Securities aren't technically being borrowed against.

From the perspective of the powers that be, according to the laws and regulations, my understanding is that such a fund pretty much looks like a huge stack of cash. The rest of it is all the open futures contracts long and short, forward contracts, swaps, overseas subsidiaries not covered by the 1920 1940 Act, etc.

In a recent article about proposed new SEC rules regarding funds, particularly junk bond funds and others heavily in more illiquid securities, this was touched on in passing.
5. Illiquid asset classes will run for new structures.

Assuming everything proposed became law tomorrow, there are several ways around the problem. The first is to use swaps. Issuers like ProShares technically run traditional ’40 Act Mutual funds that hold two assets: cash, and swaps. They get away with having one large derivatives position because, from an IRS perspective, the real asset is the giant pile of cash collateral being held against the swaps. That’s how you get 2X leveraged this and 3X minus that.

The same structure; however, could easily be used to launch, say, a clone fund tracking the same index as HYG [iShares iBoxx $ High Yield Corporate Bond]. It would be substantially less efficient than the current structure, but where there’s demand, product will blossom.

http://www.etf.com/sections/blog/secs-l ... bomb-funds

It's clear that the SEC knows about this stuff in general and has their eye on it:
http://www.sec.gov/investor/pubs/levera ... -alert.htm
http://www.bloomberg.com/news/articles/ ... -liquidity

Here is a seemingly relevant article on a search:
http://www.istockanalyst.com/finance/st ... f-leverage
Last edited by lack_ey on Sat Sep 26, 2015 8:03 pm, edited 1 time in total.

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Re: QSPIX - thoughts on interesting fund

Postby nisiprius » Sat Sep 26, 2015 8:01 pm

Lack_ey, I decided that my question was better asked in a separate thread so I'm quoting your reply there. I'm asking others who wish to comment to go there, too.

What are the limits, if any, on leverage by mutual funds?
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Re: QSPIX - thoughts on interesting fund

Postby lack_ey » Sat Sep 26, 2015 8:03 pm

Good idea. Also, I'm going to edit and fix 1920 -> 1940 so I look like slightly less of a buffoon. :D

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Re: QSPIX - thoughts on interesting fund

Postby grap0013 » Sun Sep 27, 2015 10:05 am

larryswedroe wrote:And given vol of 10% and say expected return of 7% it takes even a 3sd event to get a loss of say 20%, let alone blow up the fund causing it to go to zero. People simply don't understand IMO what they are talking about but make claims as if they do know.


Would someone mind sharing how to do the calculation from expected returns + SD to calculate possible losses? Thanks!
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Re: QSPIX - thoughts on interesting fund

Postby larryswedroe » Sun Sep 27, 2015 11:43 am

Grap, say with equities you now have an expected return for TSM of 6.5%, and SD of 20 for all equity portfolio. So one SD would mean returns would be between -13.5 and 26.5, and two SDs would be between -33.5 and 46.5, and three would be -55 and 66.5. Now you only really care about the left tail, not the right, so you have half the chance if normally distributed (which is at least reasonable for periods like a year, though stock returns are negatively skewed). So if 2/3 of returns are between -13.5 and 26.5 you have about 16% chance that in any one year the loss will be greater than 13.5. For two SDs it's about 2.5% (or once in 40 years), and three SDs you are say 0.5% (or once year 200 years).

Now QSPIX has targeted SD of 10% and expected return of 7. So you can do the math and see estimated odds of having any size loss.

Larry

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Re: QSPIX - thoughts on interesting fund

Postby lack_ey » Sun Sep 27, 2015 12:13 pm

-2.5 SD away (or lower) for a normal distribution implies a 0.6% probability of happening.

Just an IMHO but I don't take z scores beyond about +/- 1 in finance and many other fields seriously. Beyond about 1, certainly 2 standard deviations, and nobody really knows what's out there, unless you're talking about well understood, physical processes, some field with a real abundance of data, or something like actual coin flips. Most times you're trying to do some real-world estimation, your parameters and/or distribution are probably going to be wrong to some nontrivial extent.

There tends to be a lot of sloppiness in how these things are used and meant, especially in dealing with distributions known or potentially suspected to be different from normal.

If you look at even the backtested simulation for the strategy, the sample has negative skewness and some excess kurtosis (that is, results better than the average are more likely but downside further from the mean, plus fatter tails than an actual normal distribution). The mean is difficult enough to estimate even if we had independent samples (we don't; there's some serial correlation) and if the distribution weren't likely changing over time, never mind statistics of even higher moments and the issues of how relevant past statistics are to the future. But really, you shouldn't just be relying on statistics based on a simulated result; we know that many leveraged strategies and long-short funds have much higher risks of severe losses than would be implied by normal distributions. How much higher is hard to know and depends on the details.

Furthermore, the -18% seen in the backtest is over a period where the average annual return was 17% (above the risk-free rate), so this is more like a deviation of 35% from the mean. Standard deviation was about 10%. In which manner do you even understand the result? I hope not as -3.5 SD assuming it's normal (a 0.02% chance).

Plugging in unrealistic assumptions and building inaccurate models is what gets people into trouble, especially when leverage is involved. I know, we're not the ones running the fund so it doesn't really matter which models we use, but I don't think a simplified statistical 'understanding' leads to the right intuitions.

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Re: QSPIX - thoughts on interesting fund

Postby grok87 » Sun Sep 27, 2015 5:53 pm

lack_ey wrote:-2.5 SD away (or lower) for a normal distribution implies a 0.6% probability of happening.

Just an IMHO but I don't take z scores beyond about +/- 1 in finance and many other fields seriously. Beyond about 1, certainly 2 standard deviations, and nobody really knows what's out there, unless you're talking about well understood, physical processes, some field with a real abundance of data, or something like actual coin flips. Most times you're trying to do some real-world estimation, your parameters and/or distribution are probably going to be wrong to some nontrivial extent.

There tends to be a lot of sloppiness in how these things are used and meant, especially in dealing with distributions known or potentially suspected to be different from normal.

If you look at even the backtested simulation for the strategy, the sample has negative skewness and some excess kurtosis (that is, results better than the average are more likely but downside further from the mean, plus fatter tails than an actual normal distribution). The mean is difficult enough to estimate even if we had independent samples (we don't; there's some serial correlation) and if the distribution weren't likely changing over time, never mind statistics of even higher moments and the issues of how relevant past statistics are to the future. But really, you shouldn't just be relying on statistics based on a simulated result; we know that many leveraged strategies and long-short funds have much higher risks of severe losses than would be implied by normal distributions. How much higher is hard to know and depends on the details.

Furthermore, the -18% seen in the backtest is over a period where the average annual return was 17% (above the risk-free rate), so this is more like a deviation of 35% from the mean. Standard deviation was about 10%. In which manner do you even understand the result? I hope not as -3.5 SD assuming it's normal (a 0.02% chance).

Plugging in unrealistic assumptions and building inaccurate models is what gets people into trouble, especially when leverage is involved. I know, we're not the ones running the fund so it doesn't really matter which models we use, but I don't think a simplified statistical 'understanding' leads to the right intuitions.

+1
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Re: QSPIX - thoughts on interesting fund

Postby backpacker » Sun Sep 27, 2015 6:22 pm

grok87 wrote:
lack_ey wrote:-2.5 SD away (or lower) for a normal distribution implies a 0.6% probability of happening.

Just an IMHO but I don't take z scores beyond about +/- 1 in finance and many other fields seriously. Beyond about 1, certainly 2 standard deviations, and nobody really knows what's out there, unless you're talking about well understood, physical processes, some field with a real abundance of data, or something like actual coin flips. Most times you're trying to do some real-world estimation, your parameters and/or distribution are probably going to be wrong to some nontrivial extent.

There tends to be a lot of sloppiness in how these things are used and meant, especially in dealing with distributions known or potentially suspected to be different from normal.

If you look at even the backtested simulation for the strategy, the sample has negative skewness and some excess kurtosis (that is, results better than the average are more likely but downside further from the mean, plus fatter tails than an actual normal distribution). The mean is difficult enough to estimate even if we had independent samples (we don't; there's some serial correlation) and if the distribution weren't likely changing over time, never mind statistics of even higher moments and the issues of how relevant past statistics are to the future. But really, you shouldn't just be relying on statistics based on a simulated result; we know that many leveraged strategies and long-short funds have much higher risks of severe losses than would be implied by normal distributions. How much higher is hard to know and depends on the details.

Furthermore, the -18% seen in the backtest is over a period where the average annual return was 17% (above the risk-free rate), so this is more like a deviation of 35% from the mean. Standard deviation was about 10%. In which manner do you even understand the result? I hope not as -3.5 SD assuming it's normal (a 0.02% chance).

Plugging in unrealistic assumptions and building inaccurate models is what gets people into trouble, especially when leverage is involved. I know, we're not the ones running the fund so it doesn't really matter which models we use, but I don't think a simplified statistical 'understanding' leads to the right intuitions.

+1


I'll raise that +1 and make it a +2. :beer

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Re: QSPIX - thoughts on interesting fund

Postby grok87 » Sun Sep 27, 2015 7:14 pm

backpacker wrote:
grok87 wrote:
lack_ey wrote:-2.5 SD away (or lower) for a normal distribution implies a 0.6% probability of happening.

Just an IMHO but I don't take z scores beyond about +/- 1 in finance and many other fields seriously. Beyond about 1, certainly 2 standard deviations, and nobody really knows what's out there, unless you're talking about well understood, physical processes, some field with a real abundance of data, or something like actual coin flips. Most times you're trying to do some real-world estimation, your parameters and/or distribution are probably going to be wrong to some nontrivial extent...

+1


I'll raise that +1 and make it a +2. :beer

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Re: QSPIX - thoughts on interesting fund

Postby grap0013 » Mon Sep 28, 2015 7:29 am

grok87 wrote:
backpacker wrote:
grok87 wrote:
lack_ey wrote:-2.5 SD away (or lower) for a normal distribution implies a 0.6% probability of happening.

Just an IMHO but I don't take z scores beyond about +/- 1 in finance and many other fields seriously. Beyond about 1, certainly 2 standard deviations, and nobody really knows what's out there, unless you're talking about well understood, physical processes, some field with a real abundance of data, or something like actual coin flips. Most times you're trying to do some real-world estimation, your parameters and/or distribution are probably going to be wrong to some nontrivial extent...

+1


I'll raise that +1 and make it a +2. :beer

:sharebeer


It's just an estimate folks. Kinda like "expected" returns. One cannot make any decisions without some starting estimates. I think it is very safe to say QSPIX has much less max draw down potential than equities.
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Re: QSPIX - thoughts on interesting fund

Postby larryswedroe » Mon Sep 28, 2015 7:54 am

Grap, I'd say it has about half the max drawdown risk of equities and about twice that of a high quality intermediate bond portfolio (say 4-5 year maturity)
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Re: QSPIX - thoughts on interesting fund

Postby nisiprius » Mon Sep 28, 2015 8:30 am

grok87 wrote:
lack_ey wrote:-2.5 SD away (or lower) for a normal distribution implies a 0.6% probability of happening.

Just an IMHO but I don't take z scores beyond about +/- 1 in finance and many other fields seriously. Beyond about 1, certainly 2 standard deviations, and nobody really knows what's out there, unless you're talking about well understood, physical processes, some field with a real abundance of data, or something like actual coin flips. Most times you're trying to do some real-world estimation, your parameters and/or distribution are probably going to be wrong to some nontrivial extent...
And just to point out the obvious.

The daily return of the S&P 500 is said to have a standard deviation of just under 1%.

On each of the three days 9/29/2008, 10/15/2008, and 12/1/2008, the S&P 500 fell more than 8% in a single day (-8.81%, -9.03%, -8.93% respectively).

The chance of a single sample falling more than 8 standard deviations below the mean is supposed to be 6.22E-16, that is to say

0.000 000 000 000 062 2%.

So it ought to happen no more often than once in 1,600,000,000,000 days = once in 4.4 trillion years (more than 300 times the currently accepted age of the universe).

But it happened three times in less than a year.

On 10/19/1987, the S&P 500 fell 20% in a single day. Someone else can do the calculation on that.

Mean and standard deviation are very useful for many things, but they are not useful for estimating the chances of extreme events in systems that include the human element. It's not just a question of being a little off, it's not just a quibble, you can't just apply some small correction factor. Using them to estimate the chances of extreme events in human systems is just a way to kid yourself.
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Re: QSPIX - thoughts on interesting fund

Postby larryswedroe » Mon Sep 28, 2015 8:57 am

Nisiprius
It's well known that stock returns aren't close to normally distributed over very short periods. In fact Fama wrote about that about 50 years ago. But the longer you go out the more normally distributed they get. But of course they can never be normally distributed as can only lose 100% but can make unlimited upside. The returns do look log normal though over time.

You'll also note that in the huge move we had recently with the market moving over 1000 points from high to low in a day, QSPIX didn't experience any massive move. Nor has it moved a large amount on any day the market had big moves.

Larry

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Re: QSPIX - thoughts on interesting fund

Postby Bustoff » Mon Sep 28, 2015 9:47 am

If a retired investor has a 50/50 stock bond portfolio, what percentage of QSPIX is needed to capture its benefit?

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Re: QSPIX - thoughts on interesting fund

Postby grap0013 » Mon Sep 28, 2015 10:02 am

larryswedroe wrote:Grap, I'd say it has about half the max drawdown risk of equities and about twice that of a high quality intermediate bond portfolio (say 4-5 year maturity)
Larry


Great, thanks!

It does look like QSPIX has the volatility of about a 15 year duration treasury bond fund: https://www.portfoliovisualizer.com/ass ... TLH%2C+TLT
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Re: QSPIX - thoughts on interesting fund

Postby larryswedroe » Mon Sep 28, 2015 10:17 am

Bustoff
Hope this is helpful as answer depends on where you take the allocation from (and should only hold in tax advantaged account unless in lowest brackets)

If take from equity side will get about same expected return with a bit less risk due to diversification benefits. If take from bond side will get higher expected return with bit more risk, but more efficient portfolio.

Personally I own now about 3% of my portfolio there, and would not recommend more than 10%, especially given newness of the fund.
But DO NOT invest in something you don't have solid understanding of the nature of the risks and pros and cons of, or you will likely sell when fund inevitably has poor returns for some periods, making mistake of confusing strategy with outcome.

Larry

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Re: QSPIX - thoughts on interesting fund

Postby lack_ey » Mon Sep 28, 2015 10:29 am

Under some moderately realistic (maybe slightly optimistic from the fund's perspective) and somewhat optimistic assumptions of "the fund really delivers 7% returns with 10% standard deviation, doesn't crash, and remains uncorrelated with other assets" and using some simplified assumptions then you can improve the Sharpe ratio of a 50/50 allocation by about 0.05 by adding about 6-7% of the fund. Does that cross the "capture its benefit" threshold?

Why not take equally from stock and bond sides? If the stock/bond split now is appropriate, it seems like keeping the same ratio there may have some merit. Also, 50/50 is within the ballpark of an expected standard deviation of 10% or so, which is what the fund has, for what little that is worth.

Given the costs, risks, unconventionality, and deviation from most common benchmarks, it's a hard fund to give a recommendation for. It has to be something decided for oneself after a lot of study, and quite possibly not even then.

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Re: QSPIX - thoughts on interesting fund

Postby boomdeyada » Mon Sep 28, 2015 10:44 am

Unfortunately this fund isn't available and probably will never be available in Australia.

The only similar one is "BLACKROCK MULTI OPPORTUNITY ABSOLUTE RETURN FUND", which to its benefit has an established history and an impressively low max drawdown of only 7% during the GFC. Unfortunately, its management fees of 1.40% + 20% is very hard to swallow.

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Re: QSPIX - thoughts on interesting fund

Postby lack_ey » Mon Sep 28, 2015 10:54 am

boomdeyada wrote:Unfortunately this fund isn't available and probably will never be available in Australia.

The only similar one is "BLACKROCK MULTI OPPORTUNITY ABSOLUTE RETURN FUND", which to its benefit has an established history and an impressively low max drawdown of only 7% during the GFC. Unfortunately, its management fees of 1.40% + 20% is very hard to swallow.

There are lots and lots of multialternatives funds out there. Each one is a different animal. I would hesitate to call anything similar to any other without more information.

Most don't tell you how they're operating and actually identifying the securities that are "underpriced" or whatever they mean by "global macro strategies" or how that "absolute return" is generated, whether the "inefficiencies" being exploited are a feature of the past or present and so on. It's hard to get a read on what drives the performance and why, and if it's sustainable. It may or may not be worth consideration. They may or may not have some unique alpha or techniques.

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Re: QSPIX - thoughts on interesting fund

Postby Bustoff » Mon Sep 28, 2015 1:29 pm

larryswedroe wrote:Bustoff
Hope this is helpful as answer depends on where you take the allocation from (and should only hold in tax advantaged account unless in lowest brackets)

If take from equity side will get about same expected return with a bit less risk due to diversification benefits. If take from bond side will get higher expected return with bit more risk, but more efficient portfolio.

Personally I own now about 3% of my portfolio there, and would not recommend more than 10%, especially given newness of the fund.
But DO NOT invest in something you don't have solid understanding of the nature of the risks and pros and cons of, or you will likely sell when fund inevitably has poor returns for some periods, making mistake of confusing strategy with outcome.

Larry

Thanks Larry ! Appreciate your reply and word of caution. My target location is on the FI side in tax-advantaged.
The YTD chart of QSPIX vs Total Stock Market is pretty compelling evidence.

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Re: QSPIX - thoughts on interesting fund

Postby larryswedroe » Tue Sep 29, 2015 7:54 am

Bustoff
Yes the fund has performed amazingly well and despite all the turmoil in the markets, high volatility and crashing prices in equities around the globe, and commodities, the fund is now up 6% ytd.
Larry

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Re: QSPIX - thoughts on interesting fund

Postby grap0013 » Tue Sep 29, 2015 8:08 am

larryswedroe wrote:Now you only really care about the left tail, not the right, so you have half the chance if normally distributed (which is at least reasonable for periods like a year, though stock returns are negatively skewed).


Another question Larry. Stock returns are negatively skewed....but what about factor returns? It is possible QSPIX could have more right sided skewedness than left side due to its internal zero correlation of factors that tend to trend positively?
There are no guarantees, only probabilities.

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Re: QSPIX - thoughts on interesting fund

Postby lack_ey » Tue Sep 29, 2015 9:40 am

Value is said to be negatively skewed. Some say this is compensation for the improved Sharpe or "risk/return" of tilting value in stocks, for example.

Momentum (long/short in particular) is definitely known as being negatively skewed. Perhaps significantly less so if doing volatility targeting, or maybe that was a fluke of the past.

Carry is very much known as being negatively skewed. Currency carry is a well-known "pick up nickels in front of the steamroller" strategy, furthermore with downturns that frequently correspond to stock meltdowns. (It can still be profitable in the long run if there are enough nickels for every time you get steamrolled.) It should be the same for other asset classes. I mean, carry is about sitting on a position that's profitable in hopes it doesn't change. When it does, there comes the pain. Note that some other styles/asset classes might be neutral or possible trend up in crashes, so it's not all bad.

Defensive is... actually, I'm not sure.

But I think the asset class diversification within-style should reduce skewness of each style, and the combinations of styles should reduce the skewness of the composite.


Checking the paper, it looks like the skewness of the four styles are reported for value, momentum, carry, and defensive as -0.26, 0.05 (huh?), -0.99 (lol), -0.34. The momentum result is so surprising, and contradicts others' findings in the literature so much, that the authors note it, saying
One interesting thing to note is that the skewness of the momentum style is near zero (in fact, slightly positive at 0.05), despite the evidence in Daniel and Moskowitz (2013) showing momentum to be a negatively skewed strategy. Daniel and Moskowitz (2013) study separate momentum strategies in various asset classes which each possess negative skewness, but when they combine momentum strategies across asset classes, the negative skewness, while still present, is mitigated. Our results are more striking which may be due to differences in methodology or time periods studied.

So I wouldn't count on it for the future. But yes, it looks like the diversification across asset classes likely helps, as does across styles. The simulated composite had a skewness of -0.23 (with the alternate volatility/correlation estimates and weighing, -0.35).

Obviously that's only a statistical characterization of what happened over a period in which the strategies were largely known to be good. Did it never see an extreme left-tail event because it got lucky over the period or because it's that rare? We can never know.

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Re: QSPIX - thoughts on interesting fund

Postby Bustoff » Tue Sep 29, 2015 10:21 am

larryswedroe wrote:Bustoff
Yes the fund has performed amazingly well and despite all the turmoil in the markets, high volatility and crashing prices in equities around the globe, and commodities, the fund is now up 6% ytd.
Larry

What I find particularly interesting about it's performance during the recent period of acute market stress is this:

An excellent Vanguard research study titled, Dynamic correlations:The implications for portfolio construction, acknowledges academic research and historical evidence that adding higher risk premia asset classes may provide lower volatility and higher returns than those available in a typical portfolio.
However, the paper properly cautions that "during a flight to quality, increased systematic risk tends to swamp asset-specific risk, and risky assets have a tendency to suddenly become more positively correlated, often in contrast with how they perform during “normal” times."

This did not occur with QSPIX. Despite all the volatility, the the above warning of possible increased systematic risk swamping the asset-specific risk did not materialize. Obviously the time frame is short, but its still interesting.

Someone please correct me if I am missing something.

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Re: QSPIX - thoughts on interesting fund

Postby lack_ey » Tue Sep 29, 2015 10:33 am

Again, I wouldn't make much of 2-3 years of trading history. That's bad statistics.

And what's going on in the markets is hardly a flight to quality, at least not so far. There's no crisis. No systems are melting down. The volatility has yet to even approach 2011 levels. How do you even call this "acute market stress"? I don't think you should frame the analysis in terms of a 'test' for the fund, but even if you did, this isn't even a test. A quiz, maybe.

Furthermore, the Vanguard paper is about (long) asset classes. Hedged long/short funds are different in key ways.

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Re: QSPIX - thoughts on interesting fund

Postby larryswedroe » Tue Sep 29, 2015 10:35 am

Bustoff
Remember part of the strategy is defensive, which works in flight to quality, and how you get the low correlations of the strategies. Also momentum tends to work at those times, and when momentum crashes happen value does well.

Larry

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Re: QSPIX - thoughts on interesting fund

Postby matjen » Tue Sep 29, 2015 11:16 am

lack_ey wrote:Again, I wouldn't make much of 2-3 years of trading history. That's bad statistics.

And what's going on in the markets is hardly a flight to quality, at least not so far. There's no crisis. No systems are melting down. The volatility has yet to even approach 2011 levels. How do you even call this "acute market stress"? I don't think you should frame the analysis in terms of a 'test' for the fund, but even if you did, this isn't even a test. A quiz, maybe.

Furthermore, the Vanguard paper is about (long) asset classes. Hedged long/short funds are different in key ways.


Although I think your longer term outlook is correct Lack_ey, I do think us QSPIXers should be able to gently spike the football a bit given how it has performed both in the gentle markets of the past couple years and the slightly roiled markets of the past couple months. I haven't heard people trying to compare it to the Sequoia Fund (SEQUX) recently for instance. 8-)
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Re: QSPIX - thoughts on interesting fund

Postby grap0013 » Tue Sep 29, 2015 12:33 pm

matjen wrote:
lack_ey wrote:Again, I wouldn't make much of 2-3 years of trading history. That's bad statistics.

And what's going on in the markets is hardly a flight to quality, at least not so far. There's no crisis. No systems are melting down. The volatility has yet to even approach 2011 levels. How do you even call this "acute market stress"? I don't think you should frame the analysis in terms of a 'test' for the fund, but even if you did, this isn't even a test. A quiz, maybe.

Furthermore, the Vanguard paper is about (long) asset classes. Hedged long/short funds are different in key ways.


Although I think your longer term outlook is correct Lack_ey, I do think us QSPIXers should be able to gently spike the football a bit given how it has performed both in the gentle markets of the past couple years and the slightly roiled markets of the past couple months. I haven't heard people trying to compare it to the Sequoia Fund (SEQUX) recently for instance. 8-)


+1.

I have to disagree with you lack_ey here. The 3 month returns on every single one of my traditional asset classes/funds/EFTs is double digits negative. That's correction territory and everything going negative together definitely means there is some fear in the market. However, QSPIX 3 month returns are +6.85%.

What timeframe would you define as good statistics? Some posters say the US stock market history is only 3 independent 30 year periods and that is hardly enough data to derive any meaningful conclusions from. :wink:
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Re: QSPIX - thoughts on interesting fund

Postby grap0013 » Tue Sep 29, 2015 12:36 pm

Bustoff wrote:
An excellent Vanguard research study titled, Dynamic correlations:The implications for portfolio construction, acknowledges academic research and historical evidence that adding higher risk premia asset classes may provide lower volatility and higher returns than those available in a typical portfolio.
However, the paper properly cautions that "during a flight to quality, increased systematic risk tends to swamp asset-specific risk, and risky assets have a tendency to suddenly become more positively correlated, often in contrast with how they perform during “normal” times."


I knew the answer to Vanguard's conclusion before you even stated what it was. It is not in Vanguard's best interest to state otherwise. It'd be akin to AQR stating the virtues of cap weighted funds even though they do not own any.
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Re: QSPIX - thoughts on interesting fund

Postby Bustoff » Tue Sep 29, 2015 1:15 pm

grap0013 wrote:
Bustoff wrote:
An excellent Vanguard research study titled, Dynamic correlations:The implications for portfolio construction, acknowledges academic research and historical evidence that adding higher risk premia asset classes may provide lower volatility and higher returns than those available in a typical portfolio.
However, the paper properly cautions that "during a flight to quality, increased systematic risk tends to swamp asset-specific risk, and risky assets have a tendency to suddenly become more positively correlated, often in contrast with how they perform during “normal” times."


I knew the answer to Vanguard's conclusion before you even stated what it was. It is not in Vanguard's best interest to state otherwise. It'd be akin to AQR stating the virtues of cap weighted funds even though they do not own any.

Perhaps. But, the point I was trying to stress was that the fund performed the way it was designed to perform even during the period Vanguard warned it might not.

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Re: QSPIX - thoughts on interesting fund

Postby lack_ey » Tue Sep 29, 2015 1:22 pm

re: recent results

Check out these results.
Image
Inflation was 3.9% annualized over those two years. Final dollar amounts are $10,388 for stocks, $11,805 for the other asset/fund/strategy.

Looks pretty good for the other stuff, right? Positive expected returns, low correlation with stocks. Returns without market beta! Looks a bit leveraged or at least pretty risky, though, but you get some real diversification, in any case. Despite stocks falling 15-20% it held up decently.

Spoilers, if you haven't already figured out the time period and what the green line is:
http://quotes.morningstar.com/chart/fun ... A%5B%5D%7D


Process (strategy), not outcome, folks. And that means when the outcome is favorable, you don't get to celebrate or feel validated. What we know about QSPIX (which is probably less than some think, more than others think) comes mostly from the history and financial theory, not two years of live trading. We could say going in that it is pretty certain that under many market conditions, the daily (weekly, monthly, probably annual) correlation with stocks and bonds is low, and this is further strengthened by what we've seen. As for the expected value, two years doesn't say much, but if someone was expecting zero minus fees and costs, or that live trading couldn't capture broadly the kinds of things seen in a backtest, that seems less likely now, though it shouldn't change their minds completely. It just shifts the probabilities some.


Bustoff wrote:Perhaps. But, the point I was trying to stress was that the fund performed the way it was designed to perform even during the period Vanguard warned it might not.

Again, Vanguard is addressing asset classes. This is not an asset class. It's not even net invested in asset classes.

Maybe more importantly, it's just one event, which by itself is very little evidence.

This is all just focusing too much on the short term and potential "pattern" recognition. Either way, don't read too much into it.

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Re: QSPIX - thoughts on interesting fund

Postby grok87 » Tue Sep 29, 2015 9:53 pm

lack_ey wrote:re: recent results

Check out these results.
Image
Inflation was 3.9% annualized over those two years. Final dollar amounts are $10,388 for stocks, $11,805 for the other asset/fund/strategy.

Looks pretty good for the other stuff, right? Positive expected returns, low correlation with stocks. Returns without market beta! Looks a bit leveraged or at least pretty risky, though, but you get some real diversification, in any case. Despite stocks falling 15-20% it held up decently.

Spoilers, if you haven't already figured out the time period and what the green line is:
http://quotes.morningstar.com/chart/fun ... A%5B%5D%7D


Process (strategy), not outcome, folks. And that means when the outcome is favorable, you don't get to celebrate or feel validated. What we know about QSPIX (which is probably less than some think, more than others think) comes mostly from the history and financial theory, not two years of live trading. We could say going in that it is pretty certain that under many market conditions, the daily (weekly, monthly, probably annual) correlation with stocks and bonds is low, and this is further strengthened by what we've seen. As for the expected value, two years doesn't say much, but if someone was expecting zero minus fees and costs, or that live trading couldn't capture broadly the kinds of things seen in a backtest, that seems less likely now, though it shouldn't change their minds completely. It just shifts the probabilities some.


Bustoff wrote:Perhaps. But, the point I was trying to stress was that the fund performed the way it was designed to perform even during the period Vanguard warned it might not.

Again, Vanguard is addressing asset classes. This is not an asset class. It's not even net invested in asset classes.

Maybe more importantly, it's just one event, which by itself is very little evidence.

This is all just focusing too much on the short term and potential "pattern" recognition. Either way, don't read too much into it.

nice chart.
i think the broad point is that in the investment world, things that appear to be uncorrelated or negatively correlated, can suddenly become correlated often at the worst possible time...
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Re: QSPIX - thoughts on interesting fund

Postby HomerJ » Wed Sep 30, 2015 12:12 am

grap0013 wrote:I have to disagree with you lack_ey here. The 3 month returns on every single one of my traditional asset classes/funds/EFTs is
double digits negative. That's correction territory and everything going negative together definitely means there is some fear in the market.


Total Bond Market Index is up 1.17% for the past 3 months... That seems to working correctly too.

Not as good as QSPIX, but it appears not every single traditional asset classes/funds/ETFs is double-digits negative.

Wait a minute... even Total Stock Market Index is only down 8.7% over the past 3 months.

What are you invested in where everything you own except QSPIX is double-digit negative?

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Re: QSPIX - thoughts on interesting fund

Postby lack_ey » Wed Sep 30, 2015 12:31 am

IIRC grap0013 doesn't have bonds. I'm seeing growth of $10,000 of total US stock for 6/29 through 9/28 as $8,937, so maybe it's a case of different endpoints being used. The comment was posted during trading hours on 9/29 (when the market was in the red, too), so not using the dates you might be using now. If you use 6/30 through 9/29, that's less than a 10% drop. This is because there was a drop on 6/29. In any case, this is picking nits. Most broad stock categories are down something like 10%, if not more. No broad bond category should be down that much. Broad commodities are down even more, though many individual ones and some stuff like gold isn't.

Personally I'd consider cash, even if cordoned off in some kind of "emergency fund" or similar, as an asset class too, though. That for me is always up in nominal terms. Definitely not down, in any case.

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Re: QSPIX - thoughts on interesting fund

Postby grap0013 » Wed Sep 30, 2015 7:26 am

HomerJ wrote:
grap0013 wrote:I have to disagree with you lack_ey here. The 3 month returns on every single one of my traditional asset classes/funds/EFTs is
double digits negative. That's correction territory and everything going negative together definitely means there is some fear in the market.


Total Bond Market Index is up 1.17% for the past 3 months... That seems to working correctly too.

Not as good as QSPIX, but it appears not every single traditional asset classes/funds/ETFs is double-digits negative.

Wait a minute... even Total Stock Market Index is only down 8.7% over the past 3 months.

What are you invested in where everything you own except QSPIX is double-digit negative?


Yes, but QSPIX is working even better than Total Bond. That is not its purpose though. Treasury bonds are still your best bet in flights to quality. QSPIX is designed to provide uncorrelated returns to stocks and bonds. This is exactly what you can see over the past 3 months. Less max draw down and improved portfolio efficiency.

I do not own any bonds or large cap stocks except emerging markets large cap value. Total Stock Market -8.7% vs. -10%+ is a little nit picky no?
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Re: QSPIX - thoughts on interesting fund

Postby Bustoff » Wed Sep 30, 2015 8:09 am

Thanks Larry, lack_ey, matjen, grok87, and grap0013. Clearly in over my head. Appreciate your clarifications.

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Re: QSPIX - thoughts on interesting fund

Postby matjen » Wed Sep 30, 2015 9:29 am

lack_ey wrote:re: recent results

Process (strategy), not outcome, folks. And that means when the outcome is favorable, you don't get to celebrate or feel validated. What we know about QSPIX (which is probably less than some think, more than others think) comes mostly from the history and financial theory, not two years of live trading. We could say going in that it is pretty certain that under many market conditions, the daily (weekly, monthly, probably annual) correlation with stocks and bonds is low, and this is further strengthened by what we've seen. As for the expected value, two years doesn't say much, but if someone was expecting zero minus fees and costs, or that live trading couldn't capture broadly the kinds of things seen in a backtest, that seems less likely now, though it shouldn't change their minds completely. It just shifts the probabilities some.


Hey, I said "gently." That is my wiggle word as they say in law school.

Yes you are correct but the fund can only do what the fund has done. No one can predict the future and it has done everything one could ask of it so far (which is also what you are saying it seems to me). During a massive GFC, I expect Treasuries to do better. I would have also expected TIPS to do better but not sure they reacted as many expected in 2008/09. I don't hear many people saying they shouldn't be part of a portfolio for an older investor.

Also, we have 3 years of returns actually (Page 58) so your two-year point is moot. ;-)

https://www.azasrs.gov/sites/default/fi ... -18-14.pdf
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Re: QSPIX - thoughts on interesting fund

Postby lack_ey » Wed Sep 30, 2015 9:38 am

You gots me. :shock:

Anyway, it's not nothing, but it's not a lot either. Let's just go with that.

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Re: QSPIX - thoughts on interesting fund

Postby matjen » Wed Sep 30, 2015 9:55 am

lack_ey wrote:You gots me. :shock:

Anyway, it's not nothing, but it's not a lot either. Let's just go with that.


How about "it's not nothing, it's not a lot either, but it is all it could be..." Has sort of an armed forces ring to it.
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FINRA alert on alternative funds

Postby nisiprius » Wed Sep 30, 2015 2:54 pm

FINRA has an investor alert on alternative funds which I think applies to QSPIX along with many others. I don't think anything in this alert would surprise anyone who's read this thread. Many would respond to its title, "Alternative Funds Are Not Your Typical Mutual Funds" by saying "of course not, that's exactly why they interest me."

However, this alert certainly should be read by anyone considering investing in alternative funds. The fact that FINRA would issue an official alert is an indication that they have a concern about how some of these funds are being marketed and sold.

Alternative Funds Are Not Your Typical Mutual Funds
In part:
The strategies alternative mutual funds employ tend to fall on the complex end of the spectrum. Examples include hedging and leveraging through derivatives, short selling and "opportunistic" strategies that change with market conditions as various opportunities present themselves... Some alt funds... employ a market-neutral or "absolute return" strategy that uses long and short positions in stocks to generate returns.... Others may employ multiple strategies (multi-strategy funds) such as a combination of market-neutral strategies and various arbitrage strategies....

How Do Alt Funds Compare with Hedge Funds?

Although the strategies and investments of alt funds may bring to mind those of hedge funds, the two should not be confused. Alternative mutual funds are regulated under the Investment Company Act of 1940, which limits their operations in ways that do not apply to unregistered hedge funds. These protections include:

--limits on illiquid investments;
--limits on leveraging;
--diversification requirements, including limits on how much may be invested in any one issuer; and
--daily pricing and redeemability of fund shares.
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Re: QSPIX - thoughts on interesting fund

Postby grap0013 » Thu Oct 01, 2015 2:08 pm



It has been a little while since I last looked at that paper and I had forgotten how fun it was to look at.

Here's an interesting little nugget:

"Effective for periods beginning 7/1/2010, in the event a significant client directed flow occurs, portfolios are removed from the composite for the full month in which the flow occurs, and are added back to the composite at the beginning of the next full calendar month, provided the portfolio is fully invested at that time. AQR defines significant as either 50 percent of the portfolio’s NAV in cash, or 50 percent of the portfolio’s NAV in securities not representative of the makeup of the portfolio, that AQR is unable to fully equitize in advance. Composites will exclude terminated portfolios after the last full calendar month performance measurement period that the assets were under management. The Composite will continue to include the performance results for all periods prior to termination. Additional information regarding the treatment of significant cash flows is available upon request."

Somebody please correct me if I am wrong, but I think the translation of this is loosely: We have a plan for volatility targeting should a flight to liquidity occur that keeps downward standard deviation in check.
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Re: QSPIX - thoughts on interesting fund

Postby lack_ey » Thu Oct 01, 2015 2:40 pm

Whoa, I didn't read the whole thing again, but isn't that just a description of bookkeeping for the live-money composite style premia fund (not mutual fund but one of those pooled institutional accounts) results? It doesn't penalize the fund for performance on new money coming in that needs to be allocated. That pool had only $6M in assets in 2012 but ended 2013 with over $1B, which would be very disruptive for trading.

It's common even in mutual fund land for very large institutional orders to be segregated from the main body and processed in its own pool, so this may be both reflective of bookkeeping as well as actual practice. This practice and redemptions in kind are part of the tools for large funds, say bond funds dealing with some relatively illiquid underlying securities, to handle business and not disrupt other investors.

Doesn't sound like anything to do with volatility targeting to me, though as usual I may be wrong about one or multiple things.

They probably do have some procedures in place for handling both outflows and heavy losses, which may or may not be effective. There may be additional precautions over what was in place in 08-09, but that's just a guess on my part and doesn't change the fact that every plan has its holes. All part of the risks (which again, are probably overstated by some, understated by others) that need to be balanced against potential rewards.

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Re: QSPIX - thoughts on interesting fund

Postby Radjob4me » Fri Oct 09, 2015 10:17 am

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

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

Paul


Here's a "no" vote.

And here is why - right from the AQR website

""A skeptic might say “there must be a catch.” There is, of course, but it is a small one that can (and must) be managed. In order to achieve proper risk balance and attain the high returns and low correlation properties investors seek, style investing requires the “three dirty words in finance” — leverage, short-selling and derivatives. For investors willing (and able) to use these risky tools, there is the potential for huge rewards in terms of better and more stable returns.""

Both Bogle and Warren Buffet would never recommend investing in something with those fees and level of risk - I say level of risk because even if "they" say it's less volatile, you are taking them at their word since the investments are not transparent. I'm pretty sure the crash happened precisely because of the those three things they mention right out in the open

OK, so marketing says it doesn't track the market and you can use it to diversify. Of course it is adding "diversification", since adding a mystery fund to your normal investments will do that. Why not just go with any fund that has "outperformed" the market in the last few years and is more expensive.

So is it an viable investment, maybe. But for a true Boglehead, or even perhaps anyone not chasing returns, no way.

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Re: QSPIX - thoughts on interesting fund

Postby lack_ey » Fri Oct 09, 2015 10:44 am

edit: I see now you've edited some of the response above but overall the points are the same so I will let the post stand.

Radjob4me wrote:Here's a "no" vote.

Both Bogle and Warren Buffet would never recommend investing in something with those fees and level of risk - I say level of risk because even if "they" say it's less volatile, you are taking them at their word since the investments are not transparent. And there is no long term data.

It's definitely not perfect because of the offshore subsidiary, but you can check the schedule of investments in the annual report, the asset class risk allocation breakdowns and have a pretty good idea of what's in the fund. There's always a certain level of transparency for a '40 Act fund, certainly more than for most hedge funds and other structures. There is longer-term data in the form of the simulated backtest. This is also imperfect for a number of significant reasons and needs its own list of caveats. But even without long-term data, you can tell certain things from daily volatility. You can't really estimate behavior when things get weird and positive feedback loops develop, but for risk in normal market environments, sure, to some extent. Something with 2x daily volatility of something else is probably riskier overall by most definitions of risk, for example, even with non-normal distributions.

Anyway, the point remains that the level of risk is not taken on blind faith. It is verifiable to some limited degrees.

On a side note, this is completely besides the point but what does Warren Buffett have to do with anything?

Radjob4me wrote:OK, so marketing says it doesn't track the market and you can use it to diversify. Of course it is adding "diversification", since adding a mystery fund to your normal investments will do that. Why not just go with any fund that has "outperformed" the market in the last few years and is more expensive.

Are you trolling or what? The obvious reason for using this fund and not something else is that this is a systematic factor fund. Some people like factor funds more than more discretionary funds or those based on less established, perhaps in-house quant strategies. You can readily disagree with factor investing or this fund in a wide number of ways, but it should be clear why some might favor this and not something else.

Unlike the average mystery fund, we can see that this fund has a long/short implementation that is hedged to asset classes, and the data so far indicates virtually zero market beta, virtually zero correlation to the markets. And the history of factors and other research give some ideas about the correlations and diversification that might be seen, unless the future differs from the past in very specific ways. There are a lot of things that are unknowable and difficult to predict, but the level of information is a lot higher than you are implying.


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