QSPIX - thoughts on interesting fund

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Radjob4me
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Re: QSPIX - thoughts on interesting fund

Post by Radjob4me » Fri Oct 09, 2015 10:49 am

OK didn't need to say Buffet, but they have similar thoughts on investing for the masses.

I'm no to troll. But you sound like you work for AQR.

Go on AQR's website just for fun, click "total returns" where you can see all the funds. Scan the list of 3 and 5 year returns. I think 1 or 2 maybe have beaten the S&P 500 by a trivial amount, but that's without the fees, of course...

lack_ey
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Re: QSPIX - thoughts on interesting fund

Post by lack_ey » Fri Oct 09, 2015 12:14 pm

Radjob4me wrote:OK didn't need to say Buffet, but they have similar thoughts on investing for the masses.

I'm no to troll. But you sound like you work for AQR.

Go on AQR's website just for fun, click "total returns" where you can see all the funds. Scan the list of 3 and 5 year returns. I think 1 or 2 maybe have beaten the S&P 500, but that's without the fees, of course...

Okay, first of all, if I misread the intent then I apologize for wondering and insinuating one of the points was trolling (I didn't suggest you were a troll in general but questioning that sequence of statements).

Let me explain my reasoning and people can see for themselves if it is fair or wrongheaded. Statement:

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.

Notes:
1. Use of scare quotes
2. A factor fund is not particularly a mystery in terms of the big picture
3. It is evident that many people are factor investors, even if you don't agree with the reasoning
4. There are a number of known characteristics distinguishing the fund from many others, whether you think they are good or not

I figure that one of the following is true:
1. There is a lack of understanding fundamentally of the above, like the fact that factor investors exist and other people that have different opinions exist
2. There is a lack of knowledge about the fund, like that it is a factor fund
3. This is intentionally exaggerating and misrepresenting to troll (this is common when scare quotes are thrown around, in my estimation)
4. I missed something

Rather than question intellect or knowledge (or my own quick assessment), I thus questioned intent. On the flip side, I'm not sure where in my posts I sound like I'm working for AQR or are even taking their side. I try—maybe fail, you be the judge—to keep analyses factual and fair.



As for the content here, I fundamentally disagree with benchmarking alternatives investments to the S&P 500 (???)*, so if you will never see otherwise on this issue, then we will need to agree to disagree. Do you understand why people don't benchmark alternatives to the S&P 500 and disagree with the reasons, or do you not even see why? Do you benchmark bonds—let's say junk bonds or emerging markets or whatever else—to the S&P 500? Do you benchmark international stocks to the S&P 500?

You mention that some of the funds do beat the S&P 500, "without the fees" so I want to clarify here. Fund returns are always quoted net of fees, so these funds outperformed after fees. Or are you making a point about fees more generally?

*if nothing else, try international stocks, seeing as the fund goes global? But a passive long-only benchmark to a long/short fund in asset classes beyond just stocks is a stretch to me.


But for the suggestion to look at other AQR funds, in the spirit of nisiprius's line of questioning before in this thread:
viewtopic.php?f=10&t=167241&start=800#p2632993

I took a look at AQR's long-only equity funds, just using Morningstar's growth of $10,000 to be quick. I skipped the tax-managed versions because those are mostly newer and have a lot of overlap.

Code: Select all

Growth of $10,000 since inception
(almost all inception dates post-2009 bottom, but different for each fund)
                                           Fund   M* ref  alt. ref
AQGIX AQR Global Equity                   15416   12901
AQIIX AQR International Equity            14446   14637   14807^     
AUEIX AQR Large Cap Defensive Style       16139   15925* 
ANDIX AQR International Defensive Style   12496   12216   13569^
AZEIX AQR Emerging Defensive Style         9070    9910    9944+
AMOMX AQR Large Cap Momentum Style        25186   26102* 
ASMOX AQR Small Cap Momentum Style        25880   26102*  29054#
AIMOX AQR International Momentum Style    15683   15570   16720^
QEMLX AQR Emerging Momentum Style          8917    8667    8949+
QCELX AQR Large Cap Multi-Style           13944   13682*
QSMLX AQR Small Cap Multi-Style           13263   13682*  13118#
QICLX AQR International Multi-Style       11088   10431   11253^
QEELX AQR Emerging Multi-Style             8807    8667    8949+

* S&P 500
^ Vanguard developed markets (VEA)
+ Vanguard emerging markets (VWO)
# Vanguard small cap (VB)

Notes:
1. Overall uninspiring results
2. Ignore AQGIX, as that's both US and international stocks, and M*'s benchmark is ex-US. Also, unusually high fees for AQR long-only equity, like AQIIX
3. Defensive results hard to gauge as performance is usually better on the way down during a crisis but not necessarily in other times, and start dates re all post-2009 bottom
4. Bridgeway's small-cap momentum did even worse
5. A bad period for momentum?
6. Average costs maybe 30-60 bp above passive options for 1x exposure to factors, can be largely gotten cheaper elsewhere (esp. not multi-style)
7. Cost of QSPIX is 150 bp for much higher, (say 7x, if you will, though not comparable or fair because not all in stocks) exposure to factors

There seems to be more interest in the style premium fund than for the long-only equity funds and many of the other alternatives funds, so a family comparison is maybe not all that relevant. This is in part because of since-inception returns (let's not kid ourselves), but there are other reasons as well.

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

Post by Maynard F. Speer » Fri Oct 09, 2015 12:47 pm

The thing with alternative investments is you don't necessarily want them to do better than stocks when stocks are rallying ... In the 80s and 90s there were periods when hedge funds obliterated stock market returns - whether markets were going up or down - and no surprise funds got too large and strategies got arbitraged away

What you really want from alternatives is market-like performance, but at different times, or under different long-term circumstances ... Sometimes very defensive funds (which always look weak over 5 years) look fantastic over 15 years, because they've just kept plugging away, delivering a modest return, and haven't had so much value wiped out during crashes/bear markets

But I almost worry QSPIX is going to look too appealing for its own good .. I'd hope they soft-close if necessary
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Re: QSPIX - thoughts on interesting fund

Post by Angst » Fri Oct 09, 2015 12:58 pm

For one who longs to go long large cap momentum, MTUM might be worth considering. The growth chart below is since its inception, compared to AMOMX as well as ASMOX:

Image

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grap0013
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Re: QSPIX - thoughts on interesting fund

Post by grap0013 » Fri Oct 09, 2015 1:58 pm

Glad we have this QSPIX thread up and kicking again!!

All I have to say is that EM has been going up like gang busters consecutively the past several days and QSPIX has done the exact opposite the past several days. You'd have to be :shock: to not believe this fund is not correlated to traditional holdings. The question is if the fund is worth it to have something that moves independent of one's other holdings.
There are no guarantees, only probabilities.

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Re: QSPIX - thoughts on interesting fund

Post by gtwhitegold » Wed Oct 28, 2015 5:53 am

I personally would like a high volatility version of QSPIX. Since I am still fairly early in my investing life, I can tolerate more volatility. I am also considering QMHIX as a different alternatives fund.

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Re: QSPIX - thoughts on interesting fund

Post by larryswedroe » Wed Oct 28, 2015 7:33 am

gtwhitegold
Well theory is simple, just use leverage to invest in the fund, creating your own leverage
Larry

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Re: QSPIX - thoughts on interesting fund

Post by gtwhitegold » Thu Oct 29, 2015 6:52 am

I agree Larry, but what is possible may not be the preferred method. Current costs for leverage for me would increase costs with little if any increase in expected returns after costs.

Allen

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Re: QSPIX - thoughts on interesting fund

Post by larryswedroe » Thu Oct 29, 2015 7:15 am

gtwhitegold
Well if you can borrow money at below 7% --the expected nominal return---you get higher returns, perhaps not higher risk adjusted returns because of the cost of leverage/. But margin money today is pretty cheap so it's not really an issue. Or alternatively the better way would be simply to lower your bond exposure and use this more---my testing shows you get higher returns with about same volatility due to diversification benefits---more downside risk of course. But a few percent would not matter much.
Not recommending anything here, just pointing it out
Larry

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matjen
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Re: QSPIX - thoughts on interesting fund

Post by matjen » Tue Nov 03, 2015 12:04 pm

VictoriaF wrote:
Maynard F. Speer wrote:
VictoriaF wrote:The issue is not whether posters expressing skepticism will or will not invest in QSPIX. The issue is that the Bogleheads Forum is the best place on the web to educate the public about personal finance. And the public should not be deceived into assuming that investing in QSPIX is consistent with the Bogleheads principles.

Victoria


From what I understand the fund is essentially a low-cost, passive way to invest directly in alternative beta (that might otherwise incur hefty active management fees and exposure to human error)

I don't think that sounds a million miles away from a certain popular approach to investing mentioned around here ..


I disagree with your assessment. I posted a question to the Bogleheads Expert Panel to get their take on it.

Victoria


Victoria,

I just watched one panel video here: https://vimeo.com/144241520 where QSPIX wasn't discussed though factor investing in general was around the 35:30 minute mark.

Did you have any luck on your question regarding QSPIX in particular? I would not expect that panel to be big fans but still would be interested in their discussion if there was one perhaps in a later session.
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grap0013
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Re: QSPIX - thoughts on interesting fund

Post by grap0013 » Tue Nov 03, 2015 1:58 pm

I still think not being able to discuss QSPIX on this forum would be a crime. Forum members and guests are grown adults who should be able to make their own informed decisions and hold themselves responsible for the outcomes of those decisions.

Heck, some posters indirectly say forgo having a spouse and kids in order to save money and max out tax deferred accounts. I think that is much more heinous advice than discussing the pros and cons of QSPIX. I may disagree about families but we are all entitled to our opinions and discussing QSPIX is no different.
There are no guarantees, only probabilities.

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matjen
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Re: QSPIX - thoughts on interesting fund

Post by matjen » Tue Nov 03, 2015 2:10 pm

grap0013 wrote:I still think not being able to discuss QSPIX on this forum would be a crime. Forum members and guests are grown adults who should be able to make their own informed decisions and hold themselves responsible for the outcomes of those decisions.

Heck, some posters indirectly say forgo having a spouse and kids in order to save money and max out tax deferred accounts. I think that is much more heinous advice than discussing the pros and cons of QSPIX. I may disagree about families but we are all entitled to our opinions and discussing QSPIX is no different.


+1000. In no way did I mean to imply that the Expert Panel should have any say on whether we can discuss it or should discuss it. Just curious if it came up. I will note that earlier in the factor discussion Bill Bernstein did point out that you needed to go long/short (Like QSPIX) to fully exploit factors.
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grap0013
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Re: QSPIX - thoughts on interesting fund

Post by grap0013 » Tue Nov 03, 2015 4:27 pm

matjen wrote:+1000. In no way did I mean to imply that the Expert Panel should have any say on whether we can discuss it or should discuss it. Just curious if it came up. I will note that earlier in the factor discussion Bill Bernstein did point out that you needed to go long/short (Like QSPIX) to fully exploit factors.


I understood it as you intended but thanks for clarifying your view for others. I too would love to know what Bill Bernstein thinks of this fund. Although I must admit, his philosophy has seemed to have shifted from factor based investing to more liability matching since the 2008 financial collapse. No disrespect to him, but it feels like he's fighting the last war a little bit post 2008 and recency bias is affecting his investing philosophy and portfolio recommendations. Probably worthy of a whole other thread entirely to discuss.
There are no guarantees, only probabilities.

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VictoriaF
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Re: QSPIX - thoughts on interesting fund

Post by VictoriaF » Wed Nov 04, 2015 6:30 pm

matjen wrote:
VictoriaF wrote:
Maynard F. Speer wrote:
VictoriaF wrote:The issue is not whether posters expressing skepticism will or will not invest in QSPIX. The issue is that the Bogleheads Forum is the best place on the web to educate the public about personal finance. And the public should not be deceived into assuming that investing in QSPIX is consistent with the Bogleheads principles.

Victoria


From what I understand the fund is essentially a low-cost, passive way to invest directly in alternative beta (that might otherwise incur hefty active management fees and exposure to human error)

I don't think that sounds a million miles away from a certain popular approach to investing mentioned around here ..


I disagree with your assessment. I posted a question to the Bogleheads Expert Panel to get their take on it.

Victoria


Victoria,

I just watched one panel video here: https://vimeo.com/144241520 where QSPIX wasn't discussed though factor investing in general was around the 35:30 minute mark.

Did you have any luck on your question regarding QSPIX in particular? I would not expect that panel to be big fans but still would be interested in their discussion if there was one perhaps in a later session.


matjen,

Mel was reading questions to the Panel and they ran out of time before they came to this one. I discussed QSPIX with other participants off-line and not for the record.

Victoria
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gtwhitegold
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Re: QSPIX - thoughts on interesting fund

Post by gtwhitegold » Mon Dec 07, 2015 5:12 am

AQR has announced that they will soft close all share classes of the Style Premia Fund on 29 January 2016.

https://funds.aqr.com/news/soft-close-o ... tive-funds

That being said, if I hold QSPNX will I be able to convert it to QSPIX later?

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grap0013
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Re: QSPIX - thoughts on interesting fund

Post by grap0013 » Mon Dec 07, 2015 9:08 am

gtwhitegold wrote:AQR has announced that they will soft close all share classes of the Style Premia Fund on 29 January 2016.

https://funds.aqr.com/news/soft-close-o ... tive-funds

That being said, if I hold QSPNX will I be able to convert it to QSPIX later?


I doubt it.
There are no guarantees, only probabilities.

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Re: QSPIX - thoughts on interesting fund

Post by garlandwhizzer » Mon Dec 07, 2015 1:05 pm

Angst wrote:
For one who longs to go long large cap momentum, MTUM might be worth considering. The growth chart below is since its inception, compared to AMOMX as well as ASMOX:


MTUM has done well during its two year lifetime. but a large part, if not all, of its success is simply because it has been playing in the LCG space which has been outperforming during that timespan. If one compares its results to VUG, Vanguard's large cap growth etf, its results are far from impressive. According to Morningstar graphs, VUG has outperformed it for most of MTUM's existence although MTUM has nudged ahead by a hair at present which is statistically non-significant. The case for outperformance by MTUM over a LCG index, both of which operating in the same arena, LCG, has yet to be made convincingly. Backtesting the MOM factor looks very impressive with long + short portfolios, no trading costs, no options costs, no bid ask spreads, and no fund fees in this frequently trading strategy, but once again the results of real funds and efts with real costs and expenses is less impressive.

Garland Whizzer

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Re: QSPIX - thoughts on interesting fund

Post by larryswedroe » Mon Dec 07, 2015 8:37 pm

Interesting to note that today with all equities getting hammered QSPIX was up 3/4 of one percent and now up over 10% ytd. In the almost two full years of its existence the fund has more than delivered value to investors, despite the relatively high fees.
Larry

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Re: QSPIX - thoughts on interesting fund

Post by gtwhitegold » Tue Dec 08, 2015 4:39 am

That's why my wife and I intend to establish positions in both of our Roth IRA accounts before the fund soft closes.

larryswedroe wrote:Interesting to note that today with all equities getting hammered QSPIX was up 3/4 of one percent and now up over 10% ytd. In the almost two full years of its existence the fund has more than delivered value to investors, despite the relatively high fees.
Larry

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tarheel
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Re: QSPIX - thoughts on interesting fund

Post by tarheel » Tue Dec 08, 2015 7:40 am

larryswedroe wrote:Interesting to note that today with all equities getting hammered QSPIX was up 3/4 of one percent and now up over 10% ytd. In the almost two full years of its existence the fund has more than delivered value to investors, despite the relatively high fees.
Larry


Can't thank you enough Larry for introducing us to QSPIX. :sharebeer

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Re: QSPIX - thoughts on interesting fund

Post by larryswedroe » Tue Dec 08, 2015 9:23 am

tarheel
Let's hope you're still thanking me years from now (:-))
Note I increased my position quite a bit earlier this year.
Larry

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grap0013
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Re: QSPIX - thoughts on interesting fund

Post by grap0013 » Tue Dec 08, 2015 9:42 am

larryswedroe wrote:tarheel
Let's hope you're still thanking me years from now (:-))
Note I increased my position quite a bit earlier this year.
Larry


Agreed. Thanks Larry! I know I'm a renegade but I just bumped my holding up to 20% yesterday and it is going to sit there. Don't worry though, if it does not work out I'm holding myself accountable as I am an adult. :wink:

Larry, what % of your portfolio do you now have in QSPIX?

Full disclosure:

My AA is now:

40% SCV
20% iSCV
20% EMV
20% QSPIX/QSPNX
There are no guarantees, only probabilities.

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tarheel
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Re: QSPIX - thoughts on interesting fund

Post by tarheel » Tue Dec 08, 2015 10:12 am

grap0013 wrote:
larryswedroe wrote:tarheel
Let's hope you're still thanking me years from now (:-))
Note I increased my position quite a bit earlier this year.
Larry


Agreed. Thanks Larry! I know I'm a renegade but I just bumped my holding up to 20% yesterday and it is going to sit there. Don't worry though, if it does not work out I'm holding myself accountable as I am an adult. :wink:

Larry, what % of your portfolio do you now have in QSPIX?

Full disclosure:

My AA is now:

40% SCV
20% iSCV
20% EMV
20% QSPIX/QSPNX


GRAP! THE NEW QSPIX KING! :happy

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grap0013
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Re: QSPIX - thoughts on interesting fund

Post by grap0013 » Tue Dec 08, 2015 11:31 am

tarheel wrote:
GRAP! THE NEW QSPIX KING! :happy


Groovy!
There are no guarantees, only probabilities.

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Re: QSPIX - thoughts on interesting fund

Post by larryswedroe » Tue Dec 08, 2015 12:01 pm

Yep GRAP is the new king, I'm only a lowly duke with about 4% now. But I don't have that much room in tax advantaged accounts either.
Larry

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Re: QSPIX - thoughts on interesting fund

Post by Yesterdaysnews » Tue Dec 08, 2015 6:43 pm

QLENX is also performing extremely well. Perhaps holding both QLENX and QSPNX with yearly rebalancing would be a solid plan for the ALT allocation of one's portfolio.

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Re: QSPIX - thoughts on interesting fund

Post by larryswedroe » Tue Dec 08, 2015 7:00 pm

BTW I think the new fund will just eliminate the commodities exposure which is where the severe limits in capacity are. But I'm just guessing on that for now.
Larry

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Re: QSPIX - thoughts on interesting fund

Post by lack_ey » Tue Dec 08, 2015 7:16 pm

larryswedroe wrote:BTW I think the new fund will just eliminate the commodities exposure which is where the severe limits in capacity are. But I'm just guessing on that for now.
Larry

The SEC filings for the new fund indicate stocks, bonds, and currencies as the asset classes. No mention of interest rates or commodities, so I assume that's what's being cut out.

See here, for AQR Style Premia Alternative II:
http://www.sec.gov/Archives/edgar/data/ ... 85apos.htm
The Fund pursues its investment objective by aiming to provide exposure to four separate investment styles (“Styles”): value, momentum, carry and defensive, using both “long” and “short” positions within the following asset groups (“Asset Groups”): equities, bonds and currencies. The Fund may achieve its exposure to any of the Asset Groups by using derivatives rather than holding those assets directly. The Fund may also use derivatives for hedging purposes. The Fund implements the Styles by investing globally in a broad range of instruments, including, but not limited to, equities (primarily those issued by large- and mid-cap companies), futures (including index futures, equity futures and bond futures), currency forwards, options and swaps (including equity swaps, swaps on index futures and total return swaps) (collectively, the “Instruments”). The Fund may also invest in other registered investment companies including exchange-traded funds.


Compare to the original AQR Style Premia Alternative:
The Fund pursues its investment objective by aiming to provide exposure to four separate investment styles (“Styles”): value, momentum, carry and defensive, using both “long” and “short” positions within the following asset groups (“Asset Groups”): equities, bonds, interest rates, commodities and currencies. The Fund may achieve its exposure to any of the Asset Groups by using derivatives rather than holding those assets directly. The Fund may also use derivatives for hedging purposes. The Fund implements the Styles by investing globally (including emerging markets) in a broad range of instruments, including, but not limited to, equities (primarily those issued by large- and mid-cap companies), futures (including commodity futures, index futures, equity futures, bond futures and interest rate futures), currency forwards, options and swaps (including commodity
swaps, swaps on commodity futures, equity swaps, swaps on index futures, total return swaps and interest rate swaps) (collectively, the Instruments”), either by investing directly in the Instruments or, indirectly, by investing in the Subsidiary (as described below) which invests in the Instruments. The Fund may also invest in other registered investment companies including exchange-traded funds.

[emphasis added]

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Re: QSPIX - thoughts on interesting fund

Post by larryswedroe » Tue Dec 08, 2015 7:33 pm

lackey
bonds are INTEREST RATES
Larry

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Re: QSPIX - thoughts on interesting fund

Post by lack_ey » Tue Dec 08, 2015 7:56 pm

I thought they were making some kind of distinction between long-term bonds (calling these bonds) and short-term bonds (calling these interest rates), though as always I would be very unsurprised at being wrong.

In Investing with Style they separate "government bond futures" from "interest rate futures" and speak of them separately, for example, which initially threw me off.

I took the filing to mean that they're going to be using (primarily) the 10-year bond futures as in the original fund but aren't going to load up on all the 3-month contracts, which they need a lot of to fulfill the risk allocation.

But that doesn't make sense, as there aren't capacity constraints there, or are there for other markets (not the USD)?

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Re: QSPIX - thoughts on interesting fund

Post by larryswedroe » Wed Dec 09, 2015 8:54 am

lackey
don't think that capacity an issue with developed market bonds
Larry

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Re: QSPIX - thoughts on interesting fund

Post by Johno » Wed Dec 09, 2015 10:17 am

lack_ey wrote:I thought they were making some kind of distinction between long-term bonds (calling these bonds) and short-term bonds (calling these interest rates), though as always I would be very unsurprised at being wrong.
...
But that doesn't make sense, as there aren't capacity constraints there, or are there for other markets (not the USD)?

Yes in AQR-speak 'interest rates' has meant bank deposit rate futures, as for example Eurodollar futures in USD case. 'Bonds' meant futures on medium-long (typically 10 yr nominal) maturity govt bonds. Unless they're now changing it to include both under the umbrella of 'interest rates', which would be most people's interpretation of the term.

If sticking with their previous terminology, it might actually be that there's more capacity constraint in 'interest rates', because although a number of different currencies' deposit rate futures markets are large for short dated contracts, there's typically not a lot of 'juice' in relative movements among short dated contracts. OTOH only the USD Eurodollar market has big volume and liquidity in much longer dated deposit rate futures. In bonds OTOH all liquidity in every currency is concentrated in the shortest dated contracts, but they are contracts on a long maturity instrument whose price moves around more.

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Re: QSPIX - thoughts on interesting fund

Post by matjen » Fri Dec 11, 2015 6:34 pm

Up .66% today which I am sure Grap enjoyed. I am still at 5%.
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Re: QSPIX - thoughts on interesting fund

Post by raywax » Fri Dec 11, 2015 7:54 pm

matjen wrote:Up .66% today which I am sure Grap enjoyed. I am still at 5%.


He is not the only one! Right now to me it looks like a good place to hide a substantial share of one's portfolio.

Ray

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Re: QSPIX - thoughts on interesting fund

Post by nisiprius » Fri Dec 11, 2015 8:39 pm

How liquid are the assets held by leveraged long-short funds? What are those assets, exactly, and can they readily be sold quickly to meet redemptions, should the need arise?
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Re: QSPIX - thoughts on interesting fund

Post by larryswedroe » Fri Dec 11, 2015 9:10 pm

The SEC is now proposing new rules on this and IMO likely could impact funds that use derivatives limiting their leverage.
Unfortunately rules are often dumb as they don't account for risk. So you can have say 10 leverage if the leverage is on say short term Treasury rates and that would be less risky than 2x leverage on stocks. Hopefully they will come up with smart, risk-based rules. Like capital rules for banks and insurance companies are more risk based.
But funds like AQR's could be impacted. We'll have to see



Larry

lack_ey
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Re: QSPIX - thoughts on interesting fund

Post by lack_ey » Fri Dec 11, 2015 10:35 pm

nisiprius wrote:How liquid are the assets held by leveraged long-short funds? What are those assets, exactly, and can they readily be sold quickly to meet redemptions, should the need arise?

Depends on what they're going long and short and how.

Here, it's basically a huge pile of cash and little actual assets. Some funds might actually own a lot of stocks, bonds, and other assets and have open short positions on others. For this fund AQR is primarily relying on derivatives like futures contracts, forward contracts, and swaps. And they have the stake in their Cayman Islands subsidiary for some commodities trading to get around the tax issues there, as is common. The futures contracts chosen for the investment universe are intentionally restricted to the ones that have the most trading. For the stocks they don't allow small-cap stocks even though factor investors will tell you that most effects like value and momentum have historically been stronger in the small caps. Some of the stock exposure is through total basket return swaps, and the country equity indices are gotten through futures, but they should also have some decent amount of stock long and short in their account. Because the stocks are screened to be mid-or-large and relatively liquid, they'll probably be okay unless we see something much worse than 2008-2009.

Most or at least many long-short funds are probably like this except for some or most equity market neutral funds and maybe some long-short bond funds (though these make heavy use of futures generally).

I don't know what AQR is doing, but these days a lot of the forward contracts and swaps are marked to market and gains/losses realized regularly over the course of the agreement (like futures, which are marked to market and changes settled daily), rather than all at once at the end. But yes, there's technically counterparty risk with the forward contracts and swaps with the likes of Goldman Sachs, Barclays, Bank of America, etc. Maybe JPY shoots up vs. the USD and Credit Suisse can't pony up the differential. Who knows.

So the bulk of the fund is a large cash pile with money getting added or taken away from the pile every day based on whatever the performance of the underlying securities was.

The fund just needs to go to its huge cash pile to meet redemptions. And then close some contracts at the market price to adjust the leverage back to the target when convenient. If futures prices diverge considerably from the underlying securities, that's a big risk-free arbitrage opportunity for somebody. Maybe it happens. But the fund isn't obligated to open and close positions ASAP and could ride out some funny behavior unless all its positions were blowing up and its hand was forced.

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Re: QSPIX - thoughts on interesting fund

Post by grok87 » Sat Dec 12, 2015 8:28 am

nisiprius wrote:How liquid are the assets held by leveraged long-short funds? What are those assets, exactly, and can they readily be sold quickly to meet redemptions, should the need arise?


i think they are pretty liquid. for example large cap stocks, government bonds, futures, etc. they specifically avoid small cap stocks because they are not liquid enough.
so I don't think il-liquidity is the potential issue with this fund.

i think there are roughly 3 ways to shoot for "equity like returns" (which is one of this funds aims):

1) regular beta- ie total stock market index
2) apply leverage to "liquid" things other than 1) (what this fund does)
3) il-liquid stuff (what the third avenue high yield fund did)

so the risks of 1) are well known. you lost potentially up to 50% in the 2008/09 crash. even more in the great depression.

the risk of 3) is showing up right now in third avenue fund.

the risk of 2)- best recent example is probably the 1987 crash. lot's of players using leverage as part of a strategy called "portfolio insurance"
http://blogs.wsj.com/moneybeat/2013/08/ ... -and-1987/
it did not work out well- most of these people were wiped out. other example would be LTCM. betting on small market inefficiencies and leveraging them up. It's a classic hedge fund strategy because the managers make money for a while via their 2/20 fees. then when the fund blows up every 5 years or so, they walk away and start a new fund (it was not their money at risk after all).

cheers,
"...people always live for ever when there is any annuity to be paid them"- Jane Austen

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matjen
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Re: QSPIX - thoughts on interesting fund

Post by matjen » Sat Dec 12, 2015 9:11 am

grok87 wrote:1) regular beta- ie total stock market index
2) apply leverage to "liquid" things other than 1) (what this fund does)
3) il-liquid stuff (what the third avenue high yield fund did)

so the risks of 1) are well known. you lost potentially up to 50% in the 2008/09 crash. even more in the great depression.

the risk of 3) is showing up right now in third avenue fund.

the risk of 2)- best recent example is probably the 1987 crash. lot's of players using leverage as part of a strategy called "portfolio insurance"
http://blogs.wsj.com/moneybeat/2013/08/ ... -and-1987/
it did not work out well- most of these people were wiped out. other example would be LTCM. betting on small market inefficiencies and leveraging them up. It's a classic hedge fund strategy because the managers make money for a while via their 2/20 fees. then when the fund blows up every 5 years or so, they walk away and start a new fund (it was not their money at risk after all).

cheers,


LTCM you say...
It's on! :)
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grok87
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Re: QSPIX - thoughts on interesting fund

Post by grok87 » Sat Dec 12, 2015 10:39 am

matjen wrote:
grok87 wrote:1) regular beta- ie total stock market index
2) apply leverage to "liquid" things other than 1) (what this fund does)
3) il-liquid stuff (what the third avenue high yield fund did)

so the risks of 1) are well known. you lost potentially up to 50% in the 2008/09 crash. even more in the great depression.

the risk of 3) is showing up right now in third avenue fund.

the risk of 2)- best recent example is probably the 1987 crash. lot's of players using leverage as part of a strategy called "portfolio insurance"
http://blogs.wsj.com/moneybeat/2013/08/ ... -and-1987/
it did not work out well- most of these people were wiped out. other example would be LTCM. betting on small market inefficiencies and leveraging them up. It's a classic hedge fund strategy because the managers make money for a while via their 2/20 fees. then when the fund blows up every 5 years or so, they walk away and start a new fund (it was not their money at risk after all).

cheers,


LTCM you say...
It's on! :)


:)
QSPIX is obviously less levered that LTCM. But 6-7 times leverage (i.e. making $6-$7 worth of bets for every $1 that investors give you) is still enough to kill you stone dead (i.e. go to zero).

It is a good sign in my book that QSPIX has been decreasing its leverage as markets have become more volatile. at 6/30/15 the VIX was at 18 and QSPIX was 7 times levered. at 9/30/15 the VIX was at 24 and QSPIX was 6x levered. Obviously the VIX is just a proxy for the more broader market volatility that they are using to calibrate their leverage (their "volatility targeting" strategy).

But ultimately i would not put a lot of faith in the ability of their "volatility targeting" strategy to protect their investors. I recently watched Aliens and this quote comes to mind:
http://www.moviesoundclips.net/sound-clip.php?id=1636

Ellen Ripley: "These people are here to protect you. They're soldiers [volatility-targeting hedge-fund managers]."
Newt: "It won't make any difference."

i am not invested in either QSPIX or the less leveraged version QSLIX. If you want to be in this sort of strategy, i think QSLIX is preferable over QSPIX.
"...people always live for ever when there is any annuity to be paid them"- Jane Austen

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Re: QSPIX - thoughts on interesting fund

Post by Johno » Sat Dec 12, 2015 10:53 am

lack_ey wrote:
nisiprius wrote:How liquid are the assets held by leveraged long-short funds? What are those assets, exactly, and can they readily be sold quickly to meet redemptions, should the need arise?

Depends on what they're going long and short and how.
...

I don't know what AQR is doing, but these days a lot of the forward contracts and swaps are marked to market and gains/losses realized regularly over the course of the agreement (like futures, which are marked to market and changes settled daily), rather than all at once at the end. But yes, there's technically counterparty risk with the forward contracts and swaps with the likes of Goldman Sachs, Barclays, Bank of America, etc. Maybe JPY shoots up vs. the USD and Credit Suisse can't pony up the differential. Who knows.

So the bulk of the fund is a large cash pile with money getting added or taken away from the pile every day based on whatever the performance of the underlying securities was.

The fund just needs to go to its huge cash pile to meet redemptions. ... But the fund isn't obligated to open and close positions ASAP and could ride out some funny behavior unless all its positions were blowing up and its hand was forced.

I would just add a couple of points:
OTC derivatives, ie not exchange traded futures, of the type a fund like QSPIX would do are pretty much universally done on a fully collateralized basis. The credit departments of those banks, probably even without regulators looking over their shoulders, would not accept an entity like QSPIX as an uncollateralized counterparty no matter what QSPIX wanted, and virtually no such fund would want to operate otherwise anyway. So the credit risk profile of OTC stuff is going to look similar to exchange traded futures, with the exception that on futures essentially both parties put in an upfront amount of collateral with a third party, the exchange, when the contract is at zero value to each of them. In a bilateral arrangement that cushion isn't generally there. When the instrument is worth zero neither party holds collateral, so there might be full exposure to a one day move.

Then on the pile of cash, we just have to consider that some of that is committed as margin or collateral (or invested in securities held by somebody else as collateral). Not nearly all the cash pile is so committed, because if it were the fund would always be a hairsbreadth from going bust when any position moved against it and it had to cough up more collateral, but some portion of it is*. I'm not sure what the self imposed (or other limits) are for a fund like this to cash out investors before it's able to unwind the derivative positions those investors represented. But it's true the fund is much less likely to actually run out of cash for redemptions, *because* it's using derivative instruments, compared to where investments have to be sold to produce the cash to give back to investors, 1:1. IOW it's an extension of the method some regular index funds use to have some investments in futures or total return swaps on their index, so they can have more cash around without being less than 100% invested.

But since here we're speaking specifically of QPSIX, not just on general issue of coming SEC draft regs on derivatives leverage in funds, I believe it's worth reiterating the lack of foundation to assume a realistic probability that all collateralized positions will have huge one day move same direction. That would OTOH be a more valid issue with a one-way fund** using lots of derivative leverage on risky assets. As mentioned, if regulation intends to balance market safety and efficiency, it has to somehow account for the wide variation in risk for a given level of nominal leverage. But safety v efficiency is ultimately a political question, in regulation in all spheres.

*for fixed income futures for example the maintenance margin on futures contract might allow up to 100:1 leverage in theory, and the OTC derivatives don't typically have maintenance margin per se.
**umpteenthly, the positions which killed LTCM were obviously closely correlated, even in foresight, just a matter of how much they could all move and how extremely correlated, besides the leverage number being a lot bigger. It's a useless comparison no matter how many times it pops back up.

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Re: QSPIX - thoughts on interesting fund

Post by larryswedroe » Sat Dec 12, 2015 1:54 pm

Just to add how wrong IMO it is to compare the QSPIX with LTCM, those making comparisons simply are unaware of the differences in how the funds were and are run. In addition to the huge disparity in leverage (100 or more to 1 vs about 6), what caused LTCM to blow up literally had nothing to do with the strategy the firm was founded on, which was "risk arbitrage" taking long/short positions in similar assets, like long the 29 1/2 year treasury and short the 30 year. The firm blew up making directional bets on things like Russian And Brazilian bonds and even somehow thinking they were uncorrelated (all risky asset correlations go toward one in crisis and that's no secret).

QSPIX takes no "directional" or one way bets, it's all long short, so it has no net position in stocks, bonds, commodities or currencies. And it's a huge difference taking leverage of say 6:1 when long only vs. long short and it's huge difference if you are levered with assets that almost naturally have negative correlations--like value and momentum and defensive (which does well when risks show up). And it is also a huge difference if your 6:1 when investing in stocks vs say a 30 day bill where rate movements are very small and SD is tiny. The higher leverage they use is applied to the LEAST RISKY ASSETS (in a risk parity type approach).

Also while no guarantee volatility predicts volatility---historically higher than average volatility predicts future higher than average volatility. And so when vol goes up the fund reduces leverage, in attempt to keep risk about the same.

Hope that is helpful
Larry

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Re: QSPIX - thoughts on interesting fund

Post by raywax » Sat Dec 12, 2015 6:53 pm

Larry,

I find it very helpful. Thanks.

Ray

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Yesterdaysnews
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Re: QSPIX - thoughts on interesting fund

Post by Yesterdaysnews » Sun Dec 13, 2015 12:18 pm

Fridays numbers are interesting for a couple AQR funds I own:

S&P 500 -- -1.94%
QSPNX -- + 0.66%
QLENX -- -0.48%

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Re: QSPIX - thoughts on interesting fund

Post by long_gamma » Sun Dec 13, 2015 12:37 pm

Yesterdaysnews wrote:Fridays numbers are interesting for a couple AQR funds I own:

S&P 500 -- -1.94%
QSPNX -- + 0.66%
QLENX -- -0.48%



Friday was a momentum day for most of the asset classes. QSPNX fund does well on those days. Momentum has done pretty well in last 10 years. It will be interesting to see how this fund perform, when the momentum crashes and value shines
"Everyone has a plan 'till they get punched in the mouth." --Mike Tyson

grok87
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Re: QSPIX - thoughts on interesting fund

Post by grok87 » Sun Dec 13, 2015 12:50 pm

long_gamma wrote:
Yesterdaysnews wrote:Fridays numbers are interesting for a couple AQR funds I own:

S&P 500 -- -1.94%
QSPNX -- + 0.66%
QLENX -- -0.48%



Friday was a momentum day for most of the asset classes. QSPNX fund does well on those days. Momentum has done pretty well in last 10 years. It will be interesting to see how this fund perform, when the momentum crashes and value shines

Hmm.. I think the biggest momentum crash ever occured in 2009. According to the ken french website, the momentum factor lost 83% that year. And it is still underwater today. So, um, no.
"...people always live for ever when there is any annuity to be paid them"- Jane Austen

long_gamma
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Re: QSPIX - thoughts on interesting fund

Post by long_gamma » Sun Dec 13, 2015 1:23 pm

If you equate approximately growth as momentum, here is the out performance of last 10 years.

Image
upload images

I also run ETF's to simulate what AQR does, targeting 10 vol and max leverage of 2 for long and 5 vol and no leverage for shorts, results somewhat replicates atleast in their direction.
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grok87
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Re: QSPIX - thoughts on interesting fund

Post by grok87 » Sun Dec 13, 2015 1:36 pm

long_gamma wrote:If you equate approximately growth as momentum, here is the out performance of last 10 years.

Image
upload images

I also run ETF's to simulate what AQR does, targeting 10 vol and max leverage of 2 for long and 5 vol and no leverage for shorts, results somewhat replicates atleast in their direction.

Hmm...i don't mean to be rude, but growth is not the same thing as momentum. If you are into this stuff, i suggest you check out the ken french website. Just google ken french data library.
"...people always live for ever when there is any annuity to be paid them"- Jane Austen

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Re: QSPIX - thoughts on interesting fund

Post by vencat » Sun Dec 13, 2015 1:55 pm

Some interesting links regarding QSPIX for newcomers:

https://grandstreetwm.wordpress.com/?s=qspix

http://www.mutualfundobserver.com/2015/ ... mber-2015/

Personally, I'm watching this fund with interest. Not yet easily accessible to me and I would like to see a few years of performance.
Hopefully some cheaper copy cats will be available.

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Re: QSPIX - thoughts on interesting fund

Post by larryswedroe » Sun Dec 13, 2015 4:21 pm

grok
Just as addendum, momentum crashes are always on the short side (and this fund does go short). But remember only a percentage of the fund is MOM and only a percentage of the MOM is in stocks, the rest are in commodities, currencies and bonds. So even if you get caught with the equity MOM it's still not a large percent of the entire fund position.

MOM in total is about 1/3 of the risk allocation and stocks about 40%. So perhaps about 12% of the fund would be exposed to the momentum crash in stocks. An additional 20% of the portfolio is in equity indexes, don't know how they would be impacted by MOM crash.
Larry

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