QSPIX - thoughts on interesting fund

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larryswedroe
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Re: QSPIX - thoughts on interesting fund

Post by larryswedroe » Sat Sep 08, 2018 2:18 pm

just to set record straight, while fund is ranked 97 ytd it's three year ranking is 28 and if it was longer ranking since inception would be higher as in 2015 it had 2 ranking and had great year in 2014 up 11.4%

Random Walker
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Re: QSPIX - thoughts on interesting fund

Post by Random Walker » Sat Sep 08, 2018 3:24 pm

Jebediah wrote:
Thu Sep 06, 2018 10:25 pm
Random Walker wrote:
Thu Sep 06, 2018 10:26 am
Nisiprius,
I’m not sure there is a great answer to your benchmarking question. When I started using DFA funds for example, I asked the advisor about appropriate benchmarks. He said “the funds sort of serve as their own passive benchmarks”. Although that answer can sound a little slimy and not what we’re looking for, the more I’ve learned, the more I’ve come to appreciate it as true. I believe same is true for the AQR funds. If (and I agree it’s a BIG IF) we trust that the funds are passive, formulaic, no stock picking, no market timing, then the fund really is its own passive benchmark effectively. I think there is simply a matter of trust involved. Perhaps I’m just showing my naïveté. This is another reason I chose to go with a trusted advisor.

Dave
Yeah that's a bit naive and some bad salesman-speak from your advisor. We're beyond the days of needing to "trust" our simple long-only funds (QSPIX is a different story / multiheaded beast that requires a bit of faith). Instead, A) run a factor regression on portfolio visualizer and pay attention to your loads and especially your alpha. Then B) (if you invest in taxable) use Morningstar's tax cost analysis tool to see what your tax drag is.

As a legacy owner of a bunch of DFA funds and curious spectator of AQR funds who's done this exercise a ton of times, I can tell you there's nothing special going on. Very seldom does DFA stand out as the best option in a particular equity sub-class, but they tend to be above average and solid. AQR on the other hand is really sloppy with equity management. You'll find gaping holes in their funds across the board.

Knowing this, I still invest in QSPIX (tiny slice) on total faith simply because there's no competition. If iShares or Vanguard would make an equally ambitious competitor product, I'd sell out for them in a heartbeat and kick Asness and his inefficient, sloppy management to the curb.
Jebediah,
I may be a little naive, which can be treacherous. But something perhaps at least equally as dangerous for us individual amateur investors, is to know quite a bit, yet still believe we know more than we do. For example, you mention portfolio visualizer and Morningstar tax cost analysis tool. It is possible that many of us don’t use those tools appropriately, appreciate their strengths and weaknesses, know when they apply and when they don’t, or know how to account for other features of funds that these tools may not account for.
Warren Buffett has famously said “Paradoxically, when 'dumb' money acknowledges its limitations, it ceases to be dumb." In this context he was clearly referring to normal people adopting the passive index approach. But it can apply to other issues of portfolio construction as well. Mark Twain said “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.” Jebediah, not saying this necessarily applies to you, but it is something we all need to think about regarding our investment decisions.

Personally, I do think it is fair to consider DFA funds as effectively their own benchmarks, and I think it is better to simply understand what AQR Style Premia Fund does than to search for a benchmark. If this is a bit out of one's league, as it may well be for me, a professional advisor could be a good way to go. Alternatively, Buffett’s thoughts on dumb money are powerful.

Dave
Last edited by Random Walker on Sat Sep 08, 2018 3:26 pm, edited 1 time in total.

Jiu Jitsu Fighter
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Re: QSPIX - thoughts on interesting fund

Post by Jiu Jitsu Fighter » Sat Sep 08, 2018 3:25 pm

Elysium wrote:
Fri Sep 07, 2018 7:58 am
nedsaid wrote:
Thu Sep 06, 2018 11:54 pm
Elysium wrote:
Thu Sep 06, 2018 9:40 pm
Random Walker wrote:
Thu Sep 06, 2018 8:11 am
As I’ve noted before, I’m a client of his firm. I post his writings only because I think they are so valuable to us amateur individual investors, and they serve as excellent starting points for Boglehead discussions. He takes current academic literature and makes it accessible, understandable, and usable for us non professionals. By “we”, I simply mean us investors looking to create better portfolios for ourselves.
Dave
I am sorry Dave, but not everyone agrees with this, many are too polite to say it including myself. But I must say since the topic came up, Larry's advice has not been benefitial to the average amateur investor on this forum for quite a while now. It is true that he espoused passive investing and brought discussions on academic theory to the forum in the early days, however, since 2007-08 onwards it has taken a turn when he started backing alternative investments such as PIMCO CCF Fund (PCRIX), and the latest bunch of alternatives thereafter. Most of these funds are not only high cost to the investors, but they have been losing money. In fact, he simply stopped supporting CCF without even explaining about it on this forum, and many people who would have followed his advice had lost a lot of money on that investment alone. The current bunch of alternatives are likely to have same effect. I do not believe many people here follow Larry's opinions anymore, which is sort of unfortunate because he had a lot to offer once upon a time.
Actually, Larry has explained his changed position on Collateralized Commodity Futures on this forum. He also has explained why he once recommended them and the factors that caused him to change his mind. Somewhere here, there is a thread where Larry Swedroe and Rick Ferri had a spirited debate about CCFs. Larry was for them and Rick was against them. He also has explained in detail why he changed his mind about REITs as well.

The 2008-2009 financial crisis really changed a lot of things. First, Value has been on an extended vacation since then. So this has been a big factor in causing Small/Value tilted portfolios to underperform the Taylor Larimore 3 fund portfolio. Second, the diversifiers that worked during the 2000-2002 bear market were a big fail in 2008-2009. REITs, Smaller Stocks, Value, and even TIPS fell hard. Commodities and Precious Metal Stocks also helped during 2000-2002 but crashed hard in 2008-2009. Pretty much, the big financial crisis ended the commodities bull market.

In the recovery after the financial crisis and the Great Recession, REITs and TIPS ran up so much in price that many Bogleheads lost interest in them. Commodities never really recovered. So a lot of the old fashioned alternatives fell out of favor. Hence the search for new diversifiers.

Larry's journey into the new alternatives such as QSPIX has been controversial. He also has recommend Variance Risk Premium, Alternative Lending, and Reinsurance. Larry has put a lot of his own money in these investments, so his money is where his mouth is. For the record, I have not purchased any such alternative funds though I believe them to be worthy of consideration. It really is a matter of philosophy.

But no one here is above critique. I recall a lot of spirited discussions that Larry had here with forum members. We should examine his ideas just as we examine anyone else's.
The larger point here is, to put it very bluntly, he has flip flopped on CCF, REIT, Alternatives, and has been all over the place. This forum is for DIY investors who mostly are inspired by the work of Jack Bogle, and while there is room for spirited academic discussions, we cannot let that influence our portfolios every time there is something new. Therefore, his advice is not benefitial to the average DIY investor here. In fact, in order to follow his advice you have to be a client of his firm where they make these decisions for you and you trust them with your money, no matter what. I don't, and making a reasonable guess most on this forum do not need it. It may work very well for Dave since he is a client of Larry, and that is the only way in my conclusion someone is going to benefit from his work. It is neither actionable, or advisable for the average DIY investor here. Just my humble opinion.
DYI-er here (not a client of Buckingham). I've benefitted from reading anything by Larry whether it be his books or his articles on ETF.com, AdvisorPerspectives, or AlphaArchitect. He brings the latest research to the lay investor. This has instigated me to dig further into the research, white papers, etc... Sure, maybe the average investor needs to be in the three-fund portfolio, but the average investor also loses to the market, so it's more of a behavioral thing for those who do not have the stomach for tracking error. There are other (better) ways to construct a portfolio and think about risk, though.

Random Walker
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Re: QSPIX - thoughts on interesting fund

Post by Random Walker » Sat Sep 08, 2018 3:36 pm

hdas wrote:
Fri Sep 07, 2018 5:34 am
nedsaid wrote:
Thu Sep 06, 2018 11:54 pm
We should examine his ideas just as we examine anyone else's.
Its remarkable how many ppl in this worthy forum pay attention to these personages. The sagacious marketers are prevalent and have been prevalent in the world of investment, nutrition, fitness, anti-aging. Why ppl should care about self-serving opinions? ......Likely not everybody can think for themselves and focus on principles, they need a guru, pastor, coach, advisor. I wish one could be more hopeful that the younger generation of investors will end up transferring less % of their assets to the marketers and middleman.

The only prescription is to refer ppl to Dimson et al. https://press.princeton.edu/titles/7239.html

Cheers :greedy
Certainly good idea to avoid a lot of the types mentioned above. Larry clearly is in a different universe. While it’s good to avoid many of the types above, also worthwhile to note that Roger Federer has a coach and The President Of The United States has a cabinet.

Dave

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Re: QSPIX - thoughts on interesting fund

Post by larryswedroe » Sat Sep 08, 2018 8:38 pm

Just to set record straight on these statements-- was going to ignore but want to correct the misstatements so those not aware would not be fooled.
Most of these funds are not only high cost to the investors, but they have been losing money. In fact, he simply stopped supporting CCF without even explaining about it on this forum, and many people who would have followed his advice had lost a lot of money on that investment alone.
First, yes they are higher costs but only fools consider only costs vs. value added. If there were cheaper/better alternatives I would recommend them and invest in them. As example, in every single case the DFA funds, with higher costs, tilting to size and value that I have recommended have significantly outperformed what was available from Vanguard since inception. Here's example using 9/98-8/18 so can do annual rebalancing and have the funds available. The very simple three fund Larry Portfolio with 50% DFSVX, 37.5% DISVX and 12.5% DFEVX returned 12%. It's even higher if you replace as I did BOSVX for DFSVX in 9/11. The simple two fund "Taylor" VTSMX 60% and VGTSX 40% returned 7.3%. So that's 5.2% a year outperformance, and my advice cost investors, was bad advice?

Second, the three Stone Ridge Funds since inception have all had positive returns (not had losses as stated), SRRIX and AVPRX about 4% a year and LENDX over 8%., so average about 5%, lower than I expected, but not by much, and well within expected ranges, but nice premium over riskless investments and totally uncorrelated as expected. IMO SRRIX and AVPRX will have higher returns going forward and LENDX bit lower (at least if rates don't go higher). And all three eliminate basically interest rate/inflation risk. And of course I personally have very significant investments in them, as do many sophisticated institutional investors, paying the same fees.

And finally as to my not explaining about CCF, as soon as someone asked I fully explained why I had changed my views---as all smart people do when you have new information, assumptions you made change, you change instead of being stubborn to some idea just because you once held it. And changed view on REITS (not saying don't invest) but no need to as we now know they are well explained by returns to size, value, and term (so it's really not an alternative, not a separate asset class so don't need it). Again new information, based in this case on research. And now we have far superior alternatives which have no inflation risk, low correlation to stocks and bonds and have significantly higher expected returns so CCF no longer needed. No saying someone flip flops because of new information is just plain ignorant. That's changing mind based on new facts, not flip flopping which is changing mind without change in facts. And I would add this, I don't explain every move I make personally because IMO I have different knowledge base, don't confuse strategy with outcome, and are more able to stick with decisions, ignoring noise of short term results. But whenever someone asks my view I've always given it. But it's my personal view, and may not even reflect the views of my firm. It's what I do personally.


As to CCF let me add two important facts, First my advice was to IF adding CCF extend duration. If did both there was virtually no net impact on portfolio, as I showed recently. How come this is never mentioned my those criticizing? Second CCF was recommended at 3 to perhaps 5% of a portfolio, a very small allocation anyway. Now consider that vs the difference in returns from the Larry Portfolio.

Now you have facts. Draw your own conclusions.

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nedsaid
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Re: QSPIX - thoughts on interesting fund

Post by nedsaid » Sat Sep 08, 2018 8:50 pm

All I can say is that I look at the available information, think through it the best I can, and then make up my own mind. Try to go with what I know and what I understand. Others here probably do the same thing. As far as Larry Swedroe, my interaction with him on this forum has caused me to think about things a bit differently. It isn't like I dropped everything I was doing before and went 100% with everything he says, but he has helped refine my thinking.

Despite everything I read from Larry, I still own individual stocks. I still have active funds. I still own Ginnie Mae funds. I still own REITs. My bonds are not 100% US Treasury instruments. So clearly I am doing things that he would not necessarily approve of, but he has given me some ideas.

Pretty much, he has gotten me to thinking about diversifying across factors, better and more efficient portfolio construction, expected future returns, and distribution of returns.

We can also make up our own minds whether or not we should hire an advisor to help us with portfolio construction. We can make up our own minds about whether alternative funds like QSPIX really fit in our portfolio.

It does seem that there is a contest in the eyes of a few here to see who is the most intelligent. I have seen some not so subtle put downs in this thread. Our understanding of these concepts differ and even if our understanding of them is the same, we can have differences of opinion. Okay to criticize, okay to disagree, but I would like to see the put downs ended. We really can agree to disagree. Also, I don't like seeing people's motives put in the most unfavorable light possible. A gentlemanly discussion can be had here.

Edit: I was unaware of Larry's post above when I was writing this. It took me a while to compose this, when I tried to post, Larry's post came up. Evidently, I wasn't the only one here thinking along these lines. Not so much defending Larry but coming to the defense of other posters here who were getting the put downs.
A fool and his money are good for business.

Elysium
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Re: QSPIX - thoughts on interesting fund

Post by Elysium » Sat Sep 08, 2018 10:17 pm

larryswedroe wrote:
Sat Sep 08, 2018 8:38 pm
First, yes they are higher costs but only fools consider only costs vs. value added.
You lost me right there, no need to read further.

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zaboomafoozarg
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Re: QSPIX - thoughts on interesting fund

Post by zaboomafoozarg » Sat Sep 08, 2018 10:27 pm

nedsaid wrote:
Sat Sep 08, 2018 8:50 pm
As far as Larry Swedroe, my interaction with him on this forum has caused me to think about things a bit differently. It isn't like I dropped everything I was doing before and went 100% with everything he says, but he has helped refine my thinking.
Agreed.
nedsaid wrote:
Sat Sep 08, 2018 8:50 pm
Our understanding of these concepts differ and even if our understanding of them is the same, we can have differences of opinion. Okay to criticize, okay to disagree, but I would like to see the put downs ended. We really can agree to disagree.
Also very much agreed.

Sometimes I've wondered if everyone would benefit from a separate sub-forum here for more esoteric slice-and-dice factor stuff that some of us enjoy dabbling in.

Theoretical
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Re: QSPIX - thoughts on interesting fund

Post by Theoretical » Sat Sep 08, 2018 10:36 pm

zaboomafoozarg wrote:
Sat Sep 08, 2018 10:27 pm
nedsaid wrote:
Sat Sep 08, 2018 8:50 pm
As far as Larry Swedroe, my interaction with him on this forum has caused me to think about things a bit differently. It isn't like I dropped everything I was doing before and went 100% with everything he says, but he has helped refine my thinking.
Agreed.
nedsaid wrote:
Sat Sep 08, 2018 8:50 pm
Our understanding of these concepts differ and even if our understanding of them is the same, we can have differences of opinion. Okay to criticize, okay to disagree, but I would like to see the put downs ended. We really can agree to disagree.
Also very much agreed.

Sometimes I've wondered if everyone would benefit from a separate sub-forum here for more esoteric slice-and-dice factor stuff that some of us enjoy dabbling in.
Ditto. I have learned a lot and even more importantly, learned why different pieces of the portfolio puzzle work the way they do, so that I don't construct a portfolio that has unintentional risk exposures.

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nedsaid
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Re: QSPIX - thoughts on interesting fund

Post by nedsaid » Sat Sep 08, 2018 11:45 pm

Another reminder for people to be civil and respectful to each other here. Thanks.
A fool and his money are good for business.

Jebediah
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Re: QSPIX - thoughts on interesting fund

Post by Jebediah » Sat Sep 08, 2018 11:49 pm

Random Walker wrote:
Sat Sep 08, 2018 3:24 pm
Jebediah wrote:
Thu Sep 06, 2018 10:25 pm
Random Walker wrote:
Thu Sep 06, 2018 10:26 am
Nisiprius,
I’m not sure there is a great answer to your benchmarking question. When I started using DFA funds for example, I asked the advisor about appropriate benchmarks. He said “the funds sort of serve as their own passive benchmarks”. Although that answer can sound a little slimy and not what we’re looking for, the more I’ve learned, the more I’ve come to appreciate it as true. I believe same is true for the AQR funds. If (and I agree it’s a BIG IF) we trust that the funds are passive, formulaic, no stock picking, no market timing, then the fund really is its own passive benchmark effectively. I think there is simply a matter of trust involved. Perhaps I’m just showing my naïveté. This is another reason I chose to go with a trusted advisor.

Dave
Yeah that's a bit naive and some bad salesman-speak from your advisor. We're beyond the days of needing to "trust" our simple long-only funds (QSPIX is a different story / multiheaded beast that requires a bit of faith). Instead, A) run a factor regression on portfolio visualizer and pay attention to your loads and especially your alpha. Then B) (if you invest in taxable) use Morningstar's tax cost analysis tool to see what your tax drag is.

As a legacy owner of a bunch of DFA funds and curious spectator of AQR funds who's done this exercise a ton of times, I can tell you there's nothing special going on. Very seldom does DFA stand out as the best option in a particular equity sub-class, but they tend to be above average and solid. AQR on the other hand is really sloppy with equity management. You'll find gaping holes in their funds across the board.

Knowing this, I still invest in QSPIX (tiny slice) on total faith simply because there's no competition. If iShares or Vanguard would make an equally ambitious competitor product, I'd sell out for them in a heartbeat and kick Asness and his inefficient, sloppy management to the curb.
Jebediah,
I may be a little naive, which can be treacherous. But something perhaps at least equally as dangerous for us individual amateur investors, is to know quite a bit, yet still believe we know more than we do. For example, you mention portfolio visualizer and Morningstar tax cost analysis tool. It is possible that many of us don’t use those tools appropriately, appreciate their strengths and weaknesses, know when they apply and when they don’t, or know how to account for other features of funds that these tools may not account for.
Warren Buffett has famously said “Paradoxically, when 'dumb' money acknowledges its limitations, it ceases to be dumb." In this context he was clearly referring to normal people adopting the passive index approach. But it can apply to other issues of portfolio construction as well. Mark Twain said “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.” Jebediah, not saying this necessarily applies to you, but it is something we all need to think about regarding our investment decisions.

Personally, I do think it is fair to consider DFA funds as effectively their own benchmarks, and I think it is better to simply understand what AQR Style Premia Fund does than to search for a benchmark. If this is a bit out of one's league, as it may well be for me, a professional advisor could be a good way to go. Alternatively, Buffett’s thoughts on dumb money are powerful.

Dave
Dave,
You seem to not want to look at the realities of what's been sold to you.

If you're a factor junkie, as you say, then surely you can handle using PV to run a regression in order to learn the factor load and alpha of your funds, or look up tax drag on morningstar. And the reality you'll find is that DFA is doing a decent job of mildly grazing one half of the value factor while keeping negative alpha low. On tax efficiency, they are fair to average. Respectable overall, but as you shop around you'll find it's nothing you couldn't get elsewhere for cheaper and without the "it's its own benchmark" sales speak. What does that even mean? It sounds like code for "trust us, and nevermind due diligence" .

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Re: QSPIX - thoughts on interesting fund

Post by Theoretical » Sun Sep 09, 2018 12:22 am

I don’t think it’s fair to say the DFA vector, targeted value or value funds are doing a moderate job on the long-only value factor. They’re unquestionably sound on those, with deep value loads.

Otherwise, I completely agree with you on them. It’s the cost difference and the incremental gains especially on domestic SCV where it’s hard to justify.

Also, the “they are their own benchmarks” doesn’t really fly anymore and is definitely marketing speak. MSCI has a bunch of index data for even exotics like EM Small Value and the like. So does FTSE Russell.

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nedsaid
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Re: QSPIX - thoughts on interesting fund

Post by nedsaid » Sun Sep 09, 2018 12:29 am

Random Walker wrote:
Sat Sep 08, 2018 3:24 pm

Personally, I do think it is fair to consider DFA funds as effectively their own benchmarks, and I think it is better to simply understand what AQR Style Premia Fund does than to search for a benchmark. If this is a bit out of one's league, as it may well be for me, a professional advisor could be a good way to go. Alternatively, Buffett’s thoughts on dumb money are powerful.

Dave
If you want to benchmark the DFA Funds, you could compare them to similar funds offered by such firms as Vanguard or Bridgeway.

I think I understand what the advisor is saying, the DFA Funds don't have to blindly follow an index. So in that sense, such funds are their own benchmark. They can practice patient trading to avoid front running and also minimize market impact from fund transactions. But still, you want a sense of how the fund is doing. I would start with a Vanguard Fund that comes closest. There is a thread out there somewhere that talks about newer Vanguard factor based funds. At least, one would want to make comparisons with the competition.

I hear the objection that one can just make use of tools like portfolio visualizer to determine such things as factor loading and to assist in picking funds without the help of an advisor. The thing is, if you want to measure how effectively a fund loads on Value, you have to keep in mind that there is no one universal definition of Value. For example, there seems to be a decreasing emphasis on book value and more emphasis on such things as earnings and cash flow. DFA might define Value somewhat differently than Portfolio Visualizer. Just pointing out that none of this is 100% precise. If CRSP and DFA had the same definition of Small Value, you would expect Vanguard and DFA Small Value portfolios to be substantially the same. Somehow I suspect that they are not.

I will have to check into the Morningstar Tax Efficiency Tool mentioned here. Something that I didn't know about.

Part of the due diligence that an Advisory Firm would perform is meeting and interviewing the key people at mutual fund companies, you do this to make a judgment of the quality of their processes and of their team. What the tools can tell you is how well the funds loaded on factors in the past but don't take into account that fund companies will change their processes over time. In other words, human judgment is a factor in picking funds. As it should be.

An example of change of processes, I am told that when screening for its Value funds, DFA screens not only for Value but also takes Momentum and Quality into account. A departure from just selecting the 30% of the stock universe that is the cheapest. Of course, portfolio visualizer can measure this, it can tell you how much a fund loads on all those factors. But again, the definition of factors are not precise.

But let's say, for sake of discussion, that the definitions of factors are precise. Still there would be differences on how DFA would capture Small Value, how Vanguard would capture Small Value, and how Bridgeway would capture Small Value. Vanguard would follow a CRSP Index whereas DFA and Bridgeway would use their own screening criteria. DFA might consider quality and momentum where perhaps Vanguard might not.

Another thing to consider is that by combining factors a bit, you might capture a single factor even better. For example, what I have been reading suggests that Small premiums don't seem to exist anymore but if you take Quality into consideration, then the Small premium returns with a vengeance. As was cited before, Value seems to work better if you set momentum to zero and also take Quality into consideration. At least with Size and Value, Quality seems to make things better.

So yes, I would certainly use the excellent tools to compare funds. Just saying this isn't 100% precise. Also want to point out that doing comparisons can be fairly complex if you don't just eyeball things.
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Re: QSPIX - thoughts on interesting fund

Post by larryswedroe » Sun Sep 09, 2018 7:46 am

I'll add few other important points to be helpful, explaining few things.

First, as to comment that I lost him on that costs matter but only fools only consider them, ---costs should be only thing when things are commodities, like 2 S&P 500 funds. When you have differences you should evaluate the value of the differences, like patient trading, like differences in fund construction rules, like differences in loadings. They all matter and they can matter a great deal. As I said, only fools only consider only consider in the presence of differences. Now one can conclude the differences are not worth the higher expense, but ignoring them is foolish. And higher loadings have been well rewarded, well beyond costs, over the 20 years since my first book was published.

Second, all the alternatives I have recommended are all well documented in the academic literature and/or in very long historical data (like on consumer and small business loans) and very importantly all are passively managed, seeking beta (or exposure) to a factor or asset class and not alpha. They are all rules based and systematic, no active management in Fama's sense of the word (no individual security selection or market timing). The one exception was for the time I recommended it was PIMCOs CCF fund which was passive on commodity exposure but somewhat active on collateral. When they became more active, going against what they told us they would do, we left them and moved to then much lower cost DFA fund.

Third, the Stone Ridge funds (and others like it, such as Pioneer, and Colchis which I would also recommend) are going to be more expensive simply because you cannot go out and by and index of securities. SR effectively is running a bank and a reinsurance company for investors. The VRP fund is more expensive in same way because if you are price taker in options most of the premium will be wiped out due to high turnover. But if price maker you actually earn above market returns as you earn the spread. SR only writes options when it is the market market. So you need again greater infrastructure. Again, wish costs would be lower but I evaluate investments based on my expected return after costs and the diversification benefits--in other words the value added, not costs.

And finally, true wealth advisors add value well beyond the investment side of things, so it goes well beyond just value added on investing

Best wishes
Larry

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packer16
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Re: QSPIX - thoughts on interesting fund

Post by packer16 » Sun Sep 09, 2018 8:14 am

IMO to say a fund is its own benchmark is marketing & self serving. The purpose of benchmarking in the first place is assess a funds performance. Its like saying I am so special I do not need grades trust me I am doing well. In any case, if worse comes to worse you can develop a benchmark of assets of similar risk profiles (because these are other option where you can invest your money). One crude way to do this is to find assets with similar volatility. QSPIX has had a volatility of 9%, Vanguard TB has had a vol of 3% and the current VIX (S&P 500) is 15%. So a 50/50 split between stocks & bonds is roughly volatility equivalent portfolio. So the result since 2014 are: 50/50 return: 6.6%, vol: 4.7%, QSPIX return: 4.2%, vol 9.0%. It is interesting that most of the differences in return between these portfolios are the fees paid to AQR.

Now you may want to pay for QSPIX's loosely correlated returns but what is that worth? One way to measure this is to estimate the volatility drag effects. Random Walker linked to a Kites page that has the formula (geo mean = arith mean - vol^2/2). As benchmarks, stocks have a vol of 15%, bonds 3% and balanced portfolio lets say 10%. So the benefits of reducing vol from 15% to 10% is vol drag at 15% (1.13%) minus the vol drag at 10% (0.5%) or 0.63% & from 10% to 5% is 0.38%. So if you add QSPIX and assuming it has the same return as the portfolio it it being added to it should add 0.63% if it can reduce portfolio vol from 15% to 10% (lets say in an equity portfolio) or 0.38% (if is a more balanced portfolio). If original portfolio has these types of vols to begin with it is pretty hard add value with low correlations when the expense ratio is multiples of the volatility drag effect. Now this assumes the strategy works as planned also.

Packer
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Elysium
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Re: QSPIX - thoughts on interesting fund

Post by Elysium » Sun Sep 09, 2018 8:32 am

All of these theories and models are trying to outsmart the market which is really very efficient. Strategies that involve futures, swaps, and derivatives are potential time bombs that may blow up in the next serious market correction, or it may reward you well when everything else tanks. I wouldn't want to find out with my own hard earned money. The trouble is you have no idea, and in fact even the models themselves do not know for sure since they are not deterministic. Now, the investment managers and advisors will tell you to trust them and point to all kinds of theories and models, after all they are fully convinced about the virtues and will have no change to their lifestyle if your portfolio blows up. They will tell you not to look at losses in isolation, and to keep the faith.

The important question I ask myself is when a broadly diversified portfolio of stocks and bonds can get me to my destination, and there is no proven alternative to improve on it, that is accepted by the market as a whole, why then should I risk all of it. I see no reason, unless the whole market has come to agreement on these strategies as a viable alternative to stocks and bonds.

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Re: QSPIX - thoughts on interesting fund

Post by lack_ey » Sun Sep 09, 2018 8:44 am

packer16 wrote:
Sun Sep 09, 2018 8:14 am
IMO to say a fund is its own benchmark is marketing & self serving. The purpose of benchmarking in the first place is assess a funds performance. Its like saying I am so special I do not need grades trust me I am doing well. In any case, if worse comes to worse you can develop a benchmark of assets of similar risk profiles (because these are other option where you can invest your money). One crude way to do this is to find assets with similar volatility. QSPIX has had a volatility of 9%, Vanguard TB has had a vol of 3% and the current VIX (S&P 500) is 15%. So a 50/50 split between stocks & bonds is roughly volatility equivalent portfolio. So the result since 2014 are: 50/50 return: 6.6%, vol: 4.7%, QSPIX return: 4.2%, vol 9.0%. It is interesting that most of the differences in return between these portfolios are the fees paid to AQR.

Now you may want to pay for QSPIX's loosely correlated returns but what is that worth? One way to measure this is to estimate the volatility drag effects. Random Walker linked to a Kites page that has the formula (geo mean = arith mean - vol^2/2). As benchmarks, stocks have a vol of 15%, bonds 3% and balanced portfolio lets say 10%. So the benefits of reducing vol from 15% to 10% is vol drag at 15% (1.13%) minus the vol drag at 10% (0.5%) or 0.63% & from 10% to 5% is 0.38%. So if you add QSPIX and assuming it has the same return as the portfolio it it being added to it should add 0.63% if it can reduce portfolio vol from 15% to 10% (lets say in an equity portfolio) or 0.38% (if is a more balanced portfolio). If original portfolio has these types of vols to begin with it is pretty hard add value with low correlations when the expense ratio is multiples of the volatility drag effect. Now this assumes the strategy works as planned also.

Packer
If doing a performance comparison I would much rather plug in expected return figures rather than look at short-run actuals, which are extremely noisy (for estimating the distribution of returns, past or future). After all, we don't really expect stocks to return 11% over the risk-free rate, do we?

Also if looking at stocks would probably not just use S&P 500 and intentionally not look at international. It's also weird to me to look at past actual stock return and then use VIX to estimate vol rather than use past actual vol.

It's also quite possible the AQR fund return was above or below the mean value we should expect (lucky or unlucky within sample so far).

Elysium wrote:
Sun Sep 09, 2018 8:32 am
All of these theories and models are trying to outsmart the market which is really very efficient. Strategies that involve futures, swaps, and derivatives are potential time bombs that may blow up in the next serious market correction, or it may reward you well when everything else tanks. I wouldn't want to find out with my own hard earned money. The trouble is you have no idea, and in fact even the models themselves do not know for sure since they are not deterministic. Now, the investment managers and advisors will tell you to trust them and point to all kids of theories and models, after all they are fully convinced about the virtues and will have no change to their lifestyle if your portfolio blows up. They will tell you not to look at losses in isolation, and to keep the faith. The important question I ask myself is when a broadly diversified portfolio stocks and bonds can get me to my destination, and there is no proven alternative to improve it that is accepted by the market as a whole, why should then I risk all of it. I see no reason, unless the whole market has come to agreement on these strategies as a viable alternative to stocks and bonds.
For a hypothetical, what would you do if stocks cost 0.5% more to invest in (only for you, so the return is that much lower but doesn't change market pricing)? Or 1%, 2%, 3%, 5%, 10%?

At a certain point I think we would stop using stocks at all. But even at a high cost like 2%, I think we would still own stocks. The higher the cost, the lower the Sharpe ratio, but it would still be diversifying. It's just that it would be used more as a smaller portion of the portfolio, and we would switch more to other risk assets like junk bonds, real estate, P2P lending, other alternatives, etc.

The point is that the cost just changes the net return to us. Very few people and nobody here suggests basing a portfolio around high-cost alternatives. But the cost alone shouldn't be disqualifying. There are a lot of other things that should rightly be instead, if you think they're true (like if you think the net return will be negative, or think black swan downside risk is too high relative to the benefits, or the transparency is not high enough for you, etc.)


If the whole market comes to agreement on some of these alts, then we don't want them anymore as the return would be gone by then.

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Re: QSPIX - thoughts on interesting fund

Post by Elysium » Sun Sep 09, 2018 8:52 am

lack_ey wrote:
Sun Sep 09, 2018 8:44 am
Elysium wrote:
Sun Sep 09, 2018 8:32 am
All of these theories and models are trying to outsmart the market which is really very efficient. Strategies that involve futures, swaps, and derivatives are potential time bombs that may blow up in the next serious market correction, or it may reward you well when everything else tanks. I wouldn't want to find out with my own hard earned money. The trouble is you have no idea, and in fact even the models themselves do not know for sure since they are not deterministic. Now, the investment managers and advisors will tell you to trust them and point to all kids of theories and models, after all they are fully convinced about the virtues and will have no change to their lifestyle if your portfolio blows up. They will tell you not to look at losses in isolation, and to keep the faith. The important question I ask myself is when a broadly diversified portfolio stocks and bonds can get me to my destination, and there is no proven alternative to improve it that is accepted by the market as a whole, why should then I risk all of it. I see no reason, unless the whole market has come to agreement on these strategies as a viable alternative to stocks and bonds.
For a hypothetical, what would you do if stocks cost 0.5% more to invest in (only for you, so the return is that much lower but doesn't change market pricing)? Or 1%, 2%, 3%, 5%, 10%?

At a certain point I think we would stop using stocks at all. But even at a high cost like 2%, I think we would still own stocks. The higher the cost, the lower the Sharpe ratio, but it would still be diversifying. It's just that it would be used more as a smaller portion of the portfolio, and we would switch more to other risk assets like junk bonds, real estate, P2P lending, other alternatives, etc.

The point is that the cost just changes the net return to us. Very few people and nobody here suggests basing a portfolio around high-cost alternatives. But the cost alone shouldn't be disqualifying. There are a lot of other things that should rightly be instead, if you think they're true (like if you think the net return will be negative, or think black swan downside risk is too high relative to the benefits, etc.)
I am not even that concerned about the costs alone, it is the nature of the strategy and the models they rely on that I am concerned about, or to put it another way, I am not convinced the models will work in all market scenarios and until they have been tested through various cycles and accepted by the market as a whole, they cannot be relied upon to deliver what you think it will deliver. This is not a proven science and as I said in previous post the models are not deterministic. I would be willing to pay the cost, if and when the stratgy is proven through a full market cycle that lasts may be 10 to 15 years, more like 20 years is ideal.

Why would you think that if the whole market comes to agreement then the returns would be gone? Stocks and Bonds have expected returns that is agreed upon by the whole market and they have stood the test of time, they are not gone. That means, then is this an inefficiency in the market you think some who has early access will be able to exploit? I do not subscribe to that idea, not with my hard earned money anyway which took me several years of accumulation to build.

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Re: QSPIX - thoughts on interesting fund

Post by lack_ey » Sun Sep 09, 2018 9:10 am

Elysium wrote:
Sun Sep 09, 2018 8:52 am
I am not even that concerned about the costs alone, it is the nature of the strategy and the models they rely on that I am concerned about, or to put it another way, I am not convinced the models will work in all market scenarios and until they have been tested through various cycles and accepted by the market as a whole, they cannot be relied upon to deliver what you think it will deliver. This is not a proven science and as I said in previous post the models are not deterministic. I would be willing to pay the cost, if and when the stratgy is proven through a full market cycle that lasts may be 10 to 15 years, more like 20 years is ideal.
Right, sorry, I was making a point about some things other posters made and didn't mean to address that specifically to you.
Elysium wrote:
Sun Sep 09, 2018 8:52 am
Why would you think that if the whole market comes to agreement then the returns would be gone? Stocks and Bonds have expected returns that is agreed upon by the whole market and they have stood the test of time, they are not gone. That means, then is this an inefficiency in the maket you think some who has early access will be able to exploit? I do not subscribe to that idea, not with my hard earned money anyway which took me several years of accumulation to build.
Market neutral is different from long-only investing. Differential returns are more easily diminished. To reduce the (forward) expected return of stocks by half, you might need the price to double with no change in fundamentals, difficult to occur without a huge shift in risk preferences. For example to reduce the return of the value factor, you just need value stocks to get a little more expensive relative to growth stocks.

Factor and strategy returns don't necessarily rely on market inefficiencies. To an extent, they could represent returns from taking certain kinds of risks. If part of the return is from inefficiencies, then in theory that could readily go away. But regardless of the underlying drivers, if more people agree with investing in this way, it would put upwards pricing pressure on the long side and downwards on the short side relative to the current position, thus reducing the returns. And at a certain point, especially after implementation costs, the return would not be worth chasing anymore, especially in a long/short format. At an even further level, it would make sense to flip things around and bet on the opposite of the old factor (like long growth, short value).

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Re: QSPIX - thoughts on interesting fund

Post by larryswedroe » Sun Sep 09, 2018 9:13 am

Few other thoughts to be helpful

Re this:
All of these theories and models are trying to outsmart the market which is really very efficient. Strategies that involve futures, swaps, and derivatives are potential time bombs that may blow up in the next serious market correction, or it may reward you well when everything else tanks.
1) with the exception of momentum the other investments all assume market is highly efficient and none are seeking alpha, just seeking exposure to factors. And momentum is one of the 12 or so well documented anomalies that have persisted for decades (in many cases) after publication. So not trying to outsmart market as stated, just seeking to diversify sources of risk and return beyond market beta. Which is very interesting. Consider that if you think markets are efficient than you should think all risky assets have similar risk adjusted returns. And if you believe that why would you want to concentrate almost all portfolio risk in single factor of market beta when there are many other sources of unique risks? That's the question smart investors like Ray Dalio (risk parity idea) and David Swensen and many others have posed. Yes costs of course do matter. Which is why until interval funds became available I did not recommend the alternatives I do now, because hedge funds costs made them too expensive. Now that is no longer the case.

2) Futures and swaps are just another way to gain exposure to assets/factors. Nothing objectively bad about them and they are often more efficient way to gain access to the very same risks. For example, they can be used on international stocks to avoid stamp taxes and other fees that mutual funds typically pay. Also even many index funds use futures to implement strategies to cut trading costs when get in large cash flows. Just depends on how they are used. All are fully collateralized, and marked to market daily.

3) All are simply gaining exposure to well documented assets that have shown very long term persistence, pervasiveness, intuitiveness, robustness and implementability.

Lack ey
If the whole market comes to agreement on some of these alts, then we don't want them anymore as the return would be gone by then.
That just is not right. All can agree I think that reinsurance demands a risk premium as does VRP and as does consumer and small business lending. These are all risks that must be compensated in expected returns. So why would we expect the premium to go away? It's only behavioral ones that MIGHT disappear, though limits to arbitrage can prevent that.

Re a fund being its own benchmark. To determine if fund is accomplishing its objective all one has to do is to perform an attribution analysis on regular basis to determine if the fund is giving you the exposures it is designed to do, then compare the returns to those factors/assets and see if returns are in line or are there large tracking errors that are persistently in wrong direction (versus small ones that are random in nature). Having say a fund which has much deeper exposures to size and value compared to say a Russell 2000 index or MSCI can be very misleading as the performance will depend on whether the factor is outperforming or underperforming, not whether the fund is doing its job. So I would expect BOSVX to underperform R2KV when size and value are negative and vice versa. So the fund is not "bad" when it underperforms nor good when it outperforms. It's just doing its job. And that by the way is exactly what we see. We go through on quarterly basis that type attribution analysis with all the funds we use to make sure fund is doing exactly what it is supposed to be doing.

Hope above is helpful

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Re: QSPIX - thoughts on interesting fund

Post by columbia » Sun Sep 09, 2018 9:36 am

I guess the detailed holdings of this fund are...a secret:
https://funds.aqr.com/our-funds/alterna ... ative-fund

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Re: QSPIX - thoughts on interesting fund

Post by lack_ey » Sun Sep 09, 2018 9:50 am

larryswedroe wrote:
Sun Sep 09, 2018 9:13 am
Lack ey
If the whole market comes to agreement on some of these alts, then we don't want them anymore as the return would be gone by then.
That just is not right. All can agree I think that reinsurance demands a risk premium as does VRP and as does consumer and small business lending. These are all risks that must be compensated in expected returns. So why would we expect the premium to go away? It's only behavioral ones that MIGHT disappear, though limits to arbitrage can prevent that.
That's why I wrote "some" and not "all." Sorry for not being more explicit.

The alts that are basically just betas, like reinsurance, are not part of that "some."

And as I said earlier, it's possible for trades to be overloaded to a level such that they have negative expected return, especially after costs. We can't assume that everything will be compensated at a proper level. Every investment and especially a differential trade can be bad given the wrong prices.

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Re: QSPIX - thoughts on interesting fund

Post by larryswedroe » Sun Sep 09, 2018 9:57 am

Lack ey
Agree totally, that's true of MARKET BETA too, as was the case in March 2000 when real expected return was below that of totally riskless TIPS!
So it doesn't just apply to alts, but to all assets, which is why valuations matter a great deal and should not be totally ignored.

BTW, interesting note, if value has been arbed away due to cash flows, as many state, then where are massive gains to value in last 10 years? Of course initially when cash flows come to exploit anomalies, while reducing spreads they RAISE the historical return which in turn lowers future expected returns. The fact is there is no evidence either in spreads or cash flows that value is crowded trade. in fact last time I looked value to growth spreads virtually the same they were right after FF published their famous paper.

On other hand the low beta anomaly purely behavioral has seen massive cash flows which has caused it to shift from value regime when there has been historical premium to growth regime when premium was negative. So again valuations matter a great deal.

Larry
Last edited by larryswedroe on Sun Sep 09, 2018 10:01 am, edited 1 time in total.

Random Walker
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Re: QSPIX - thoughts on interesting fund

Post by Random Walker » Sun Sep 09, 2018 9:57 am

Sorry I caused so much drama saying the passive DFA funds serve as their own benchmarks. Thanks to Larry for making my point way better. What matters is exposure to the factors and that a fund stays true to it’s targeted exposures. The attribution analyses would display that.

Dave

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Re: QSPIX - thoughts on interesting fund

Post by Elysium » Sun Sep 09, 2018 10:05 am

Random Walker wrote:
Sun Sep 09, 2018 9:57 am
Sorry I caused so much drama saying the passive DFA funds serve as their own benchmarks.
I have no problem accepting DFA funds as their own benchmarks, as I understand the methodology behind them. I have owned four DFA funds (SV, LV, Intl Small, and EMV) for more than 10-12 years now through retirement / college plans, and watched their behavior to have enough confidence in their strategy. Just not confident about the new found factors / alts.

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Re: QSPIX - thoughts on interesting fund

Post by lack_ey » Sun Sep 09, 2018 10:18 am

Elysium wrote:
Sun Sep 09, 2018 10:05 am
I have no problem accepting DFA funds as their own benchmarks, as I understand the methodology behind them. I have owned four DFA funds (SV, LV, Intl Small, and EMV) for more than 10-12 years now through retirement / college plans, and watched their behavior to have enough confidence in their strategy. Just not confident about the new found factors / alts.
Defensive / low vol / low beta (not the same but related) go back to what, Fischer Black's 1972 paper or more? Momentum trading is how old, though formalized more in the 1990s? Carry trading is how many decades old?

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Re: QSPIX - thoughts on interesting fund

Post by Elysium » Sun Sep 09, 2018 10:27 am

lack_ey wrote:
Sun Sep 09, 2018 10:18 am
Elysium wrote:
Sun Sep 09, 2018 10:05 am
I have no problem accepting DFA funds as their own benchmarks, as I understand the methodology behind them. I have owned four DFA funds (SV, LV, Intl Small, and EMV) for more than 10-12 years now through retirement / college plans, and watched their behavior to have enough confidence in their strategy. Just not confident about the new found factors / alts.
Defensive / low vol / low beta (not the same but related) go back to what, Fischer Black's 1972 paper or more? Momentum trading is how old, though formalized more in the 1990s? Carry trading is how many decades old?
How many open ended mutual funds exist employing these strategies profitability for 20+ years?

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Re: QSPIX - thoughts on interesting fund

Post by packer16 » Sun Sep 09, 2018 11:05 am

The big assumption on value vs. growth spreads is the future growth and risk is same over time. I would expect as the market becomes more efficient the more operationally and financially leveraged firms would migrate to the value bucket & thus eliminate a portion of the value premium caused by less levered firms that were a part of the value bucket in earlier times. It would be nice to have an apples to apples operationally and financially leveraged value sample to see if the value premium is still present.

Packer
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Re: QSPIX - thoughts on interesting fund

Post by packer16 » Sun Sep 09, 2018 11:18 am

lack_ey wrote:
Sun Sep 09, 2018 8:44 am
packer16 wrote:
Sun Sep 09, 2018 8:14 am
IMO to say a fund is its own benchmark is marketing & self serving. The purpose of benchmarking in the first place is assess a funds performance. Its like saying I am so special I do not need grades trust me I am doing well. In any case, if worse comes to worse you can develop a benchmark of assets of similar risk profiles (because these are other option where you can invest your money). One crude way to do this is to find assets with similar volatility. QSPIX has had a volatility of 9%, Vanguard TB has had a vol of 3% and the current VIX (S&P 500) is 15%. So a 50/50 split between stocks & bonds is roughly volatility equivalent portfolio. So the result since 2014 are: 50/50 return: 6.6%, vol: 4.7%, QSPIX return: 4.2%, vol 9.0%. It is interesting that most of the differences in return between these portfolios are the fees paid to AQR.

Now you may want to pay for QSPIX's loosely correlated returns but what is that worth? One way to measure this is to estimate the volatility drag effects. Random Walker linked to a Kites page that has the formula (geo mean = arith mean - vol^2/2). As benchmarks, stocks have a vol of 15%, bonds 3% and balanced portfolio lets say 10%. So the benefits of reducing vol from 15% to 10% is vol drag at 15% (1.13%) minus the vol drag at 10% (0.5%) or 0.63% & from 10% to 5% is 0.38%. So if you add QSPIX and assuming it has the same return as the portfolio it it being added to it should add 0.63% if it can reduce portfolio vol from 15% to 10% (lets say in an equity portfolio) or 0.38% (if is a more balanced portfolio). If original portfolio has these types of vols to begin with it is pretty hard add value with low correlations when the expense ratio is multiples of the volatility drag effect. Now this assumes the strategy works as planned also.

Packer
If doing a performance comparison I would much rather plug in expected return figures rather than look at short-run actuals, which are extremely noisy (for estimating the distribution of returns, past or future). After all, we don't really expect stocks to return 11% over the risk-free rate, do we?

Also if looking at stocks would probably not just use S&P 500 and intentionally not look at international. It's also weird to me to look at past actual stock return and then use VIX to estimate vol rather than use past actual vol.

It's also quite possible the AQR fund return was above or below the mean value we should expect (lucky or unlucky within sample so far).

Elysium wrote:
Sun Sep 09, 2018 8:32 am
All of these theories and models are trying to outsmart the market which is really very efficient. Strategies that involve futures, swaps, and derivatives are potential time bombs that may blow up in the next serious market correction, or it may reward you well when everything else tanks. I wouldn't want to find out with my own hard earned money. The trouble is you have no idea, and in fact even the models themselves do not know for sure since they are not deterministic. Now, the investment managers and advisors will tell you to trust them and point to all kids of theories and models, after all they are fully convinced about the virtues and will have no change to their lifestyle if your portfolio blows up. They will tell you not to look at losses in isolation, and to keep the faith. The important question I ask myself is when a broadly diversified portfolio stocks and bonds can get me to my destination, and there is no proven alternative to improve it that is accepted by the market as a whole, why should then I risk all of it. I see no reason, unless the whole market has come to agreement on these strategies as a viable alternative to stocks and bonds.
For a hypothetical, what would you do if stocks cost 0.5% more to invest in (only for you, so the return is that much lower but doesn't change market pricing)? Or 1%, 2%, 3%, 5%, 10%?

At a certain point I think we would stop using stocks at all. But even at a high cost like 2%, I think we would still own stocks. The higher the cost, the lower the Sharpe ratio, but it would still be diversifying. It's just that it would be used more as a smaller portion of the portfolio, and we would switch more to other risk assets like junk bonds, real estate, P2P lending, other alternatives, etc.

The point is that the cost just changes the net return to us. Very few people and nobody here suggests basing a portfolio around high-cost alternatives. But the cost alone shouldn't be disqualifying. There are a lot of other things that should rightly be instead, if you think they're true (like if you think the net return will be negative, or think black swan downside risk is too high relative to the benefits, or the transparency is not high enough for you, etc.)


If the whole market comes to agreement on some of these alts, then we don't want them anymore as the return would be gone by then.
The issue with using expected returns for QSPIX is there is no history of this strategy working in real market for more than 5 years. If we look at the last 5 year it has beaten Vanguard Total Bond by 2.4% per year. So the total return based upon history is 5.4% (assuming 3% for bonds). If we assume 3% for bonds and 7.5% for stocks, you end up 5.3% for the 50/50 mix. Pretty close for a probably lower vol portfolio. The VIX & historical vol are pretty close according to Morningstar. I thought given that QSPIX invested in a diversity of factors that it would smooth out the over/underperformance however it appears that the fund is still subject to factor timing risk.

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Re: QSPIX - thoughts on interesting fund

Post by staythecourse » Sun Sep 09, 2018 11:35 am

Taylor Larimore wrote:
Thu Sep 06, 2018 6:27 am
"We are trying to create more efficient portfolios by diversifying away from the market factor."
Dave:

Who are "we?" Are you associated with with Larry Swedroe? I notice you are often first to introduce Larry's writings?

Thank you and best wishes.
Taylor
I'm sorry that is was not appropriate. It seems the poster believes in Mr. Swedroe writing and resposts what he believes in for others who may be interested. How is this any different between you who posts about the 3 Fund (which is a fine choice) because you believe in it and every article or comment that supports it?

In the end EVERYONE is susceptible to confirmation bias and you are no different nor am I or anyone else for that matter. Everyone loves to hear posts supporting what they do as it makes them feel better about their own choices. If the poster wants to post about factor investing more power to him. It might not be what I do, but always like to hear other views.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

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Re: QSPIX - thoughts on interesting fund

Post by larryswedroe » Sun Sep 09, 2018 11:54 am

How many open ended mutual funds exist employing these strategies profitability for 20+ years?
While we don't have that we do have evidence for many decades in some cases. For example, there are several papers on CTAs which have been using Time Series MOM strategies for many decades (managed futures) and I've written about the results that clearly show value added in terms of diversification benefits ---and now implementation costs are much lower both trading costs and expense ratios as don't have to pay 2-20.

DFA has been using carry strategies in fixed income for decades now. And so have many hedge funds, profitably.

Unfortunately for many investors the hedge funds took most of the gross return benefits, making them not approrpriate, and of course they are typically opaque and often active, so not systematic (though not always the case). But today that is no longer true both for factors in long-short and for other assets like reinsurance and alternative lending and VRP. And the premiums are all well documented as are the trading costs incurred today (see summary of the best paper on trading costs here https://alphaarchitect.com/2018/08/14/ ... ng-costs/

Now most individual investors may not be aware of the data and the evidence, but that doesn't mean it doesn't exist.
Larry

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Re: QSPIX - thoughts on interesting fund

Post by Random Walker » Sun Sep 09, 2018 12:32 pm

Staythecourse,
I’m glad that you brought confirmation bias up. I agree with you that there is a huge amount of confirmation bias involved in my posts and what I read. I actually do think about this a lot! I’m happy to hear others are as much subject to it as I am :-). Never looked at it this way, but there is a positive side to confirmation bias. If we continue to learn new information that further supports the basis for an initially well thought out investment plan, it can only further strengthen our resolve to stick to the plan. Of course it’s important to be open minded as well; there’s a balance. Higher up in the thread someone references a recent Cliff Asness essay and I started a separate thread on it as well. He makes the great comment that it’s important to be open minded. Just not so much that our brains fall out! :-)

Dave

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Re: QSPIX - thoughts on interesting fund

Post by Elysium » Sun Sep 09, 2018 1:35 pm

I found some interesting quotes attributed to Cliff Asness, the co-founder and CIO of AQR Capital Management who manages QSPIX along with several other funds.

Quotes:

"The average relative asking for advice, I say 'have you heard of this man Jack Bogle? He's a very nice man,'"

I think as a starting point, I don't think (markets) are perfectly efficient. I do think we can do better. He's an investing hero of mine and I would disagree with Jack on this. But I think it's a better starting place to believe in Jack Bogle than to believe in eight stocks for many people," Asness said.

Do we try to do better than benchmarks? Yes. That makes us active, yes," Asness said. "When I'm talking about active here, I'm talking about stock pickers. I'm cynical without being dismally cynical about this. But if you find your average stock picker, I will bet a lot that they think the market is way more inefficient than I do."

"I'll tell you what a Jack Bogle ... would tell you. 'The averages still can't beat the average, that's just math. And if they charge any fee above and you buy the average active manager, you're going to lose. You have to buy the right active manager.' They are not wrong," Asness responded.

End Quotes.

That confirms what I have said in this thread, this type of strategy is not for most investors including the majority on this forum. He thinks he is a better active manager than most, you be the judge.

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Re: QSPIX - thoughts on interesting fund

Post by grap0013 » Tue Sep 11, 2018 2:37 pm

larryswedroe wrote:
Tue Sep 04, 2018 9:28 am
To be helpful
ROUGHLY
ytd three of the four styles are positive this year, with defensive, and momentum both up about 5% or so, with carry up about 2.5% and cash contributing about 0.5%. That's all gross of course. Value on other hand down about 20%, with about 12% of the 20 coming from individual stocks and industries and equity indices (countries) losing another about 2.5%. Rest comes from value in bonds, commodities and currencies.



Larry
Larry, you are back on Bogleheads?!?! Amazing!! :-)
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Re: QSPIX - thoughts on interesting fund

Post by larryswedroe » Tue Sep 11, 2018 4:25 pm

grap
Not really, very limited, just trying to be helpful pointing out factual errors or providing answers where I can be of help. However, as always happy to answer any emails to lswedroe@bamadvisor.com.
Best wishes
Larry

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Re: QSPIX - thoughts on interesting fund

Post by grap0013 » Tue Sep 11, 2018 5:25 pm

larryswedroe wrote:
Tue Sep 11, 2018 4:25 pm
grap
Not really, very limited, just trying to be helpful pointing out factual errors or providing answers where I can be of help. However, as always happy to answer any emails to lswedroe@bamadvisor.com.
Best wishes
Larry
Got it, thanks!
There are no guarantees, only probabilities.

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Re: QSPIX - thoughts on interesting fund

Post by Bitzer » Fri Nov 09, 2018 6:47 pm

QSPIX has been up nicely in the last couple of days. I wonder if it will finally do what it is supposed to do? Yes, I know two days doesn't mean much of anything, but it's still nice to see after all these years of waiting.

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Re: QSPIX - thoughts on interesting fund

Post by Random Walker » Fri Nov 09, 2018 6:54 pm

Bitzer wrote:
Fri Nov 09, 2018 6:47 pm
QSPIX has been up nicely in the last couple of days. I wonder if it will finally do what it is supposed to do? Yes, I know two days doesn't mean much of anything, but it's still nice to see after all these years of waiting.
Today:
S&P500 -0.92%
Russell2K -1.82%
QSPIX +0.84%
QRPRX +0.53%
DFA 5 year global fixed income +0.09%

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Re: QSPIX - thoughts on interesting fund

Post by matjen » Fri Nov 09, 2018 6:55 pm

Bitzer wrote:
Fri Nov 09, 2018 6:47 pm
QSPIX has been up nicely in the last couple of days. I wonder if it will finally do what it is supposed to do? Yes, I know two days doesn't mean much of anything, but it's still nice to see after all these years of waiting.
I'm not sure what you expect but the fund has matched a globally diversified 60 VT/40 IEI portfolio with zero correlation to the market and has destroyed Vanguard's Market Neutral offering VMNFX. It has had a rough several months for sure but that is to be expected from time to time.
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Re: QSPIX - thoughts on interesting fund

Post by edgeagg » Fri Nov 09, 2018 7:07 pm

matjen wrote:
Fri Nov 09, 2018 6:55 pm
Bitzer wrote:
Fri Nov 09, 2018 6:47 pm
QSPIX has been up nicely in the last couple of days. I wonder if it will finally do what it is supposed to do? Yes, I know two days doesn't mean much of anything, but it's still nice to see after all these years of waiting.
I'm not sure what you expect but the fund has matched a globally diversified 60 VT/40 IEI portfolio with zero correlation to the market and has destroyed Vanguard's Market Neutral offering VMNFX. It has had a rough several months for sure but that is to be expected from time to time.
May I ask why I'd just not buy VFIAX or VPMAX (for the managed route) instead of QSPIX. While I agree that it is uncorrelated with the broader market, we don't know if it will be uncorrelated during a recession.

Just sayin....

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Re: QSPIX - thoughts on interesting fund

Post by nedsaid » Fri Nov 09, 2018 7:09 pm

matjen wrote:
Fri Nov 09, 2018 6:55 pm
Bitzer wrote:
Fri Nov 09, 2018 6:47 pm
QSPIX has been up nicely in the last couple of days. I wonder if it will finally do what it is supposed to do? Yes, I know two days doesn't mean much of anything, but it's still nice to see after all these years of waiting.
I'm not sure what you expect but the fund has matched a globally diversified 60 VT/40 IEI portfolio with zero correlation to the market and has destroyed Vanguard's Market Neutral offering VMNFX. It has had a rough several months for sure but that is to be expected from time to time.
Seeing how AQR is taking a big thrashing on another thread, it is interesting to see QSPIX do what it was designed to do.
A fool and his money are good for business.

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Re: QSPIX - thoughts on interesting fund

Post by Random Walker » Fri Nov 09, 2018 7:16 pm

matjen wrote:
Fri Nov 09, 2018 6:55 pm
Bitzer wrote:
Fri Nov 09, 2018 6:47 pm
QSPIX has been up nicely in the last couple of days. I wonder if it will finally do what it is supposed to do? Yes, I know two days doesn't mean much of anything, but it's still nice to see after all these years of waiting.
I'm not sure what you expect but the fund has matched a globally diversified 60 VT/40 IEI portfolio with zero correlation to the market and has destroyed Vanguard's Market Neutral offering VMNFX. It has had a rough several months for sure but that is to be expected from time to time.
I think it’s important people appreciate the apples to oranges comparison of QSPIX to VMNFX. I know matjen does; he’s just showing the performance. But the VG market neutral fund only invests in equities. No comment on the website what factors it is trying to access. QSPIX goes long short in 4 asset classes: equities, bonds, currencies, commodities. There are diversification benefits within each style between asset classes and diversification benefits between the styles. There are big time efficiencies gained by accessing multiple styles and asset classes in the same fund. Those efficiencies are certainly worth some additional cost. Does anyone know if VMNFX uses leverage?

Dave

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Re: QSPIX - thoughts on interesting fund

Post by Random Walker » Fri Nov 09, 2018 7:23 pm

edgeagg wrote:
Fri Nov 09, 2018 7:07 pm
matjen wrote:
Fri Nov 09, 2018 6:55 pm
Bitzer wrote:
Fri Nov 09, 2018 6:47 pm
QSPIX has been up nicely in the last couple of days. I wonder if it will finally do what it is supposed to do? Yes, I know two days doesn't mean much of anything, but it's still nice to see after all these years of waiting.
I'm not sure what you expect but the fund has matched a globally diversified 60 VT/40 IEI portfolio with zero correlation to the market and has destroyed Vanguard's Market Neutral offering VMNFX. It has had a rough several months for sure but that is to be expected from time to time.
May I ask why I'd just not buy VFIAX or VPMAX (for the managed route) instead of QSPIX. While I agree that it is uncorrelated with the broader market, we don't know if it will be uncorrelated during a recession.

Just sayin....
I think you know the answer. Those are pure equity funds, dominated by market beta. Market beta dominates virtually all of our portfolios. It is the easiest and cheapest factor to invest in. We are discussing improving portfolio efficiency by diversifying away from that single factor. QSPIX has no net exposure to market beta, yet has Pre tax equity like expected returns. What matters is the portfolio as a whole. We can’t invest in past performance. We can only invest looking forward to an unknown future.

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Re: QSPIX - thoughts on interesting fund

Post by LadyGeek » Fri Nov 09, 2018 7:24 pm

nedsaid wrote:
Fri Nov 09, 2018 7:09 pm
Seeing how AQR is taking a big thrashing on another thread, it is interesting to see QSPIX do what it was designed to do.
For those who wish to discuss that perspective, see: A reminder: Stay away from AQR

(One thread for each perspective, much like we've done for the stocks in freefall / stocks are soaring threads.)
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Re: QSPIX - thoughts on interesting fund

Post by edgeagg » Fri Nov 09, 2018 8:23 pm

Random Walker wrote:
Fri Nov 09, 2018 7:23 pm
I think you know the answer. Those are pure equity funds, dominated by market beta. Market beta dominates virtually all of our portfolios. It is the easiest and cheapest factor to invest in. We are discussing improving portfolio efficiency by diversifying away from that single factor. QSPIX has no net exposure to market beta, yet has Pre tax equity like expected returns. What matters is the portfolio as a whole. We can’t invest in past performance. We can only invest looking forward to an unknown future.

Dave
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Re: QSPIX - thoughts on interesting fund

Post by nisiprius » Sat Nov 10, 2018 7:24 am

Random Walker wrote:
Fri Nov 09, 2018 7:23 pm
...QSPIX has no net exposure to market beta, yet has Pre tax equity like expected returns...
More than once you have used phrases like "pre tax equity like expected return." I want to bug you about that.

If QSPIX has "pre tax equity like expected returns" than the S&P 500 would be an appropriate benchmark, not the "three month Treasury bills" AQR uses.

Source
Image

If QSPIX has "equity like expected return," then it is fair to say that since inception, it has failed dismally to meet that expectation. (It's perfectly reasonable to add "but of course, five years is far to be soon to be making a judgement.")

Average annual return (CAGR) QSPIX, 4.85%, VFAIX (S&P 500 index fund) 11.30%.
Total money made by a $10,000 investment since inception, QSPIX about $3,000, VFIAX about $7,000. That's not some technicality.

Now when I've said things like that in past, IIRC posters (not you) have accused me of setting up a straw man. They say "O, nobody ever said QSPIX would have stock-like returns, I don't expect it to, nobody expects it to, but it has low correlation with stocks." Well, yeah, but there are lots of things that have lower returns than stocks and low correlation with stocks. Bonds, for example.

So, I want to pin you down on what you personally expect from QSPIX. Is it
  • Pre tax equity like expected return with low correlation to stocks, or...
  • Lower than equity returns, balanced and justified by low correlation to stocks?
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Re: QSPIX - thoughts on interesting fund

Post by matjen » Sat Nov 10, 2018 8:30 am

nisiprius wrote:
Sat Nov 10, 2018 7:24 am

If QSPIX has "pre tax equity like expected returns" than the S&P 500 would be an appropriate benchmark, not the "three month Treasury bills" AQR uses.
I want to pin you down Nisi on why you would select the S&P to represent all of equities? Is that appropriate or is that just the best performing equity class the last 5-10 years? What is the equity portfolio for someone outside of the US? Would S&P be their largest equity position? At a minimum the "Appropriate" equity bogey should be VT which (until this year) QSPIX was ahead of and is still within shouting distance. If, instead, you just as reasonably selected Vanguard Total International (VTIAX) then...oops. How about Total Bond which I believe represents the largest position in your portfolio and you rightly claim also is uncorrelated/low correlation with equities. OUCH! This constant gamesmanship where people compare QSPIX to whatever they desire is tiring. Look back at those comparing it to Sequoia Fund back when QSPIX was doing well against virtually everything else. Then it was Sequoia that went down 30% or something and not QSPIX. If we were having this discussion in 2009 someone would chime in claiming a Hussmann Fund is what it should be compared to!

The only "reasonable" equity fund to jokingly compare QSPIX without bias would be VT (global equities). The comparison is silly. The only reasonable fund in existence when QSPIX hit our radar which others suggested (Grok for instance) would be Vanguard Market Neutral VMNFX (which interestingly also uses T-Bills as a benchmark). Not because it is the same thing but because it tries to provide return without being correlated to the market. It has returned similar to Total Bond if memory serves.

I'm not Dave but I have been on the record saying I would be quite ecstatic if QSPIX could match a global 60/40 Portfolio over the long haul. For me that Bogey Portfolio would be 60% VT and 40% IEI (Intermediate Treasuries). As of now they are in a tie. QSPIX was well ahead until this year but has obviously taken its lumps. Welcome to investing!

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Re: QSPIX - thoughts on interesting fund

Post by Random Walker » Sat Nov 10, 2018 9:26 am

nisiprius wrote:
Sat Nov 10, 2018 7:24 am
Random Walker wrote:
Fri Nov 09, 2018 7:23 pm
...QSPIX has no net exposure to market beta, yet has Pre tax equity like expected returns...
More than once you have used phrases like "pre tax equity like expected return." I want to bug you about that.

If QSPIX has "pre tax equity like expected returns" than the S&P 500 would be an appropriate benchmark, not the "three month Treasury bills" AQR uses.

Source
Image

If QSPIX has "equity like expected return," then it is fair to say that since inception, it has failed dismally to meet that expectation. (It's perfectly reasonable to add "but of course, five years is far to be soon to be making a judgement.")

Average annual return (CAGR) QSPIX, 4.85%, VFAIX (S&P 500 index fund) 11.30%.
Total money made by a $10,000 investment since inception, QSPIX about $3,000, VFIAX about $7,000. That's not some technicality.

Now when I've said things like that in past, IIRC posters (not you) have accused me of setting up a straw man. They say "O, nobody ever said QSPIX would have stock-like returns, I don't expect it to, nobody expects it to, but it has low correlation with stocks." Well, yeah, but there are lots of things that have lower returns than stocks and low correlation with stocks. Bonds, for example.

So, I want to pin you down on what you personally expect from QSPIX. Is it
  • Pre tax equity like expected return with low correlation to stocks, or...
  • Lower than equity returns, balanced and justified by low correlation to stocks?
Can’t argue with much of what you wrote. By Pre tax equity like expected returns, I mean 6-7%. Stock valuations have been high over the period we’ve been talking about QSPIX, and thus expected market returns lower. Over the time frame you chose, I’d say stocks have beaten their expected returns based on valuations (and humbled me in the process). So in deciding on QSPIX, I’d use an expected pretax return of 6-7%, expected SD of 10%, and assume no correlation to stocks or bonds.

Dave

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Re: QSPIX - thoughts on interesting fund

Post by Random Walker » Sat Nov 10, 2018 10:55 am

Nisiprius,
Here’s a good response. Not my own, it’s an example from Larry Swedroe. He like Matjen above, thinks a 60/40 portfolio is a reasonable yardstick. The rationale is should compare investments with similar volatilities. QSPIX has an expected volatility of about 10. Stocks have vol about 20% and intermediate bonds about 5%. So expected volatility of 60/40 portfolio also about 10.

Portfolio 1 3.49% ret, 6.71% SD, 0.46 Sharpe Ratio
Portfolio 2 5.00% ret, 7.10% SD, 0.64 Sharpe Ratio

Portfolio 1 is 60/40 VTIAX/VBIIX
Portfolio 2 is QSPRX

period is 10/14-9/18 quarterly rebalancing

The whole story isn’t just in the comparison in isolation though. It’s the diversification benefit this fund provides to the portfolio already dominated by stocks and bonds.

Most recently QSPIX has been hit hard by the poor performance of value

Dave

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Re: QSPIX - thoughts on interesting fund

Post by Random Walker » Sat Nov 10, 2018 11:21 am

So now I’m getting adventurous with Portfolio visualizer. I think what really matters is how an addition affects the portfolio as a whole. So I thought I’d look at two portfolios derived from the base 60/40 described above. In the first option I arbitrarily created a 10% QSPIX position by taking 5% from equities and 5% from bonds. In the second option, I effectively did what I did with my own portfolio. I decided to assume a little more risk for what I thought was proportionately more return. In the second option I took the 10% QSPIX position from the bond side.

Portfolio 1. 3.49% ret, 6.71 SD, 0.46 SR
Portfolio 2. 3.71% ret, 6.17 SD, 0.53 SR
Portfolio 3. 3.83% ret, 6.66 SD, 0.51 SR

P1 60/40 VTIAX/VBIIX
P2 55/35/10 VTIAX/VBIIX/QSPIX
P3 60/30/10 VTIAX/VBIIX/QSPIX

Dave

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