SpaceCowboy wrote: ↑
Sun Feb 11, 2018 7:49 pm
QSPIX is just so misunderstood. It has been an amazing fund. The appropriate benchmark for it is not global equities or a 60/40 balanced fund, it’s either cash or ST bonds. The fund has nowhere near the volatility of a 60/40 portfolio.
It has absolutely provided diversification benefits through its lack of correlation with both bonds and equities.
People somehow forget that this is a beta=0 fund. It has equal long and short positions. Despite this it has provided meaningful positive returns net of fees.
It’s really a great product and I’m glad I bought it when it was available.
By "nowhere near the volatility" you mean higher, right? It's been more volatile than 60/40 since inception.
https://www.portfoliovisualizer.com/ass ... ingDays=60
That said, the obvious point to make is that 60/40 has been less volatile than usual since 2013. But the AQR Style Premia fund has also undershot its volatility targets and been less volatile than expected. I think overall, annualized volatility around 10% might be closer to normal for both the fund and for 60/40.
But overall if a fund is likely to have low correlation to other assets, the volatility doesn't matter very much because unless you have a heavy allocation to it, it won't increase overall portfolio volatility much. So far the returns have been extremely good for a live fund considering the lack of net exposures, much better than most in the category and contrary to a lot of expectations.
As before the underlying trading strategies and positioning all make sense (in terms of fitting with others' past success and the literature) and are proven, at least as far as these things go in the world of finance. A few years of real-world validation are nice I suppose, but it's not like carry strategies or anything else are any kind of revelation.
in_reality wrote: ↑
Sun Feb 11, 2018 7:57 pm
Taylor Larimore wrote: ↑
Sun Feb 11, 2018 12:50 pm
In my view, anyone who owns "60% TSM (Total U.S. Stock Market" and "40% TBM (Total U.S. Bond Market)" already
has nearly all U.S. "factors" in their portfolio.
I agree that Taylor has a correct view on this.
Random Walker wrote: ↑
Sun Feb 11, 2018 1:52 pm
As you know, TSM certainly has exposure to all the stocks, but no net exposure to the factors.
Net exposure isn't determining your returns though.
If I hold a 50% stock 50% treasury portfolio, I have no net exposure to equities right! Equities are still driving my returns though aren't they!
Now it's true that having a net exposure to an asset class with higher expected returns might be beneficial, but even at 50% I will get the benefit of equity returns for the portion I have invested.
The same goes for value in TSM.
If over the next 10 years the CAGR's are:
value stocks 100%
growth stocks 0%
The way you make it sound is that my return will be 0% because of "no net exposure to the value factor". That's not true though. TSM holds both and that is diversification - 50% return.
I do understand your point that value stocks have a higher expected return, and so a net exposure can be beneficial. I tilt to value stocks myself.
Still, I think the notion that "you aren't diversified until you tilt against the market" is misleading.
No, that's just not right based on how the factors are defined. If you have 50% stocks and 50% Treasuries, you have a 50% exposure to stocks, according to anybody. Do a factor attribution and you'll see about 0.5 market beta (which is a factor, just not one of the factors covered by QSPIX). Well, if you don't include fixed-income factors, it may show a bit lower than 0.5, owing to the negative stock market beta of Treasury bonds we've seen in the last decade and more. But nobody says 0% except for I-don't-even-know-where-you-got-the-strawman.
Under a factor model, the total stock market is exposed to the market factor but not the other factors. That's how the construction works based on how the factors are defined.
If value stocks return 100% and growth stocks 0%, the market return will be positive, and so will the value factor return. If you hold the market, you will get that market factor return. But as stated you will not be exposed to the value factor.