Our market-neutral strategy relies on the quantitative models I mentioned earlier, which we use to separate good firms from bad firms within industries. But here the goal is overall performance with as little systematic relationship with the stock market as possible.
Rather than overweight and underweight securities versus a benchmark, our market-neutral strategy has a long portfolio and a short portfolio with risk characteristics that we try to balance. If we build these two subportfolios successfully, and if our models enable us to separate good from bad, we should produce positive performance unrelated to the market. That doesn't mean that when the stock market is down, our overall portfolio necessarily will be up or at zero. Our goal is positive average performance that has no relationship with the market over time.
Again, quantitative investing is not a single strategy; it speaks more to the tools.
A man is rich in proportion to the number of things he can afford to let alone.
Someone is trying to stir up trouble! But thanks for the heads up!
I'm not a financial professional. Post is info only & not legal advice. No attorney-client relationship exists with reader. Scrutinize my ideas as if you spoke with a guy at a bar. I may be wrong.
There are lots of fund shops using quantitative models for trading, some to inform discretionary, more traditional active management, and others purely rules-based. Nothing new for Vanguard's quantitative equity group, and nothing much special or distinctive here... except maybe that the team has a decent track record.
Like most of them, they're not open about what they trade on exactly because presumably it's not just Fama-French-style factors. They imply that they're using some in-house designed and vetted processes. Could be a good thing; maybe not. I wouldn't really equate it with DFA or AQR, though.
Vanguard has always offered active funds. They even offer alternative "index" funds like those based on dividends or styles like growth/value...
Vanguard's bent is to offering financial products at lower cost. If there's a demand for something that they can offer at a lower cost I'm sure they'll come around to offering it.
Maybe Vanguard will give AQR competition for the moniker Cliff Asness proudly claims of "type of hedge funds Bogle hates least"
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
Argument 1: What does Vanguard know that all the other super-smart institutionally-employed quants don't know?
Argument 2: The academic evidence (not to mention simple arithmetic) seems to overwhelmingly indicate that active management loses, and even if it wins, it's pretty much impossible to distinguish luck from skill: Luck versus Skill in Mutual Fund Performance .
Since large low cost index funds are not subject to the vagaries of active management, it seems reasonable to infer that true α for a portfolio of these funds is close to zero. In other words, going forward we expect that a portfolio of low cost index funds will perform about as well as a portfolio of the top three percentiles of past active winners, and better than the rest of the active fund universe.
Kevin
If I make a calculation error, #Cruncher probably will let me know.
Yes, but OUR fund is run by a set of investing geniuses who employ rigorous fundamental anaylsis and highly quantitative methods to identify transient inefficiencies overlooked by less skilled investors. Using our unique market perspective. ......
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either |
--Swedroe |
We assume that markets are efficient, that prices are right |
--Fama
Strategic equity (VSEQX) - Vanguard all the way (run by Gus Sauter himself the first decade) — volatile but definitely beating its peers, though not by much and with definitely greater risk in the last 10 years http://quotes.morningstar.com/chart/fun ... 2%3A955%7D
Global minimum volatility (VMNVX) - Vanguard since inception two years ago — has massively outperformed in this short window and with lower volatility even than low-vol index funds of all stripes, aided by strong defensive stock performance and strengthening dollar (it currency hedges the international) http://quotes.morningstar.com/chart/fun ... 2%3A955%7D
Alternative strategies (VASFX) - Vanguard since inception this August — has definitely beaten its peers and with pretty tame volatility... but this is two months http://quotes.morningstar.com/chart/fun ... A%5B%5D%7D
I didn't check for closed funds, so the above probably reflects survivorship bias. Did this group run their market-timing fund? What else am I forgetting?
Kevin M wrote:Sounds like a bunch of gobbledygook to me.
Argument 1: What does Vanguard know that all the other super-smart institutionally-employed quants don't know?
Argument 2: The academic evidence (not to mention simple arithmetic) seems to overwhelmingly indicate that active management loses, and even if it wins, it's pretty much impossible to distinguish luck from skill: Luck versus Skill in Mutual Fund Performance .
Since large low cost index funds are not subject to the vagaries of active management, it seems reasonable to infer that true α for a portfolio of these funds is close to zero. In other words, going forward we expect that a portfolio of low cost index funds will perform about as well as a portfolio of the top three percentiles of past active winners, and better than the rest of the active fund universe.
Kevin
Same here. I would be very skeptical. I am a tad curious, but I would only allocate a very small percentage in this approach, probably not enough to be worth it.
Good luck to them though and the people who decide to follow them
Kevin M wrote:Sounds like a bunch of gobbledygook to me.
Argument 1: What does Vanguard know that all the other super-smart institutionally-employed quants don't know?
Argument 2: The academic evidence (not to mention simple arithmetic) seems to overwhelmingly indicate that active management loses, and even if it wins, it's pretty much impossible to distinguish luck from skill: Luck versus Skill in Mutual Fund Performance .
Since large low cost index funds are not subject to the vagaries of active management, it seems reasonable to infer that true α for a portfolio of these funds is close to zero. In other words, going forward we expect that a portfolio of low cost index funds will perform about as well as a portfolio of the top three percentiles of past active winners, and better than the rest of the active fund universe.
Kevin
Same here. I would be very skeptical. I am a tad curious, but I would only allocate a very small percentage in this approach, probably not enough to be worth it.
Good luck to them though and the people who decide to follow them
I think this argument's overly reductive ... As modern portfolio theory informs us, for an investment to improve risk-adjusted (and in some cases absolute) returns over long periods, it only has to offer equity-like returns, with low correlation to equity returns
Sometimes bonds fulfill this role - but sometimes stocks and bonds move together, and sometimes bonds deliver negative real returns for long periods .. So to have a third asset class that moves independently of stocks and bonds can help deliver a more robust portfolio, and reduce the risk of having too much concentrated in a single asset class
“Because for any given level of return, if you diversify, you can generate that return with a lower risk; or for any given level of risk, if you diversify, you can generate a higher return. So it’s a free lunch. Diversification makes your portfolio better.” – David Swensen
"Economics is a method rather than a doctrine, an apparatus of the mind, a technique of thinking, which helps its possessor to draw correct conclusions." - John Maynard Keynes
kazper wrote:Same here. I would be very skeptical. I am a tad curious, but I would only allocate a very small percentage in this approach, probably not enough to be worth it.
Good luck to them though and the people who decide to follow them
I hope some day to be able to put a "very small percentage" of my portfolio in VMNFX with its $250,000 minimum for Investor shares.
Afan wrote:
"Yes, but OUR fund is run by a set of investing geniuses who employ rigorous fundamental anaylsis and highly quantitative methods to identify transient inefficiencies overlooked by less skilled investors. Using our unique market perspective. ....."
Exactly. That's the lingo. Consider me one of your fans.
Kevin M wrote:Sounds like a bunch of gobbledygook to me.
Argument 1: What does Vanguard know that all the other super-smart institutionally-employed quants don't know?
Argument 2: The academic evidence (not to mention simple arithmetic) seems to overwhelmingly indicate that active management loses, and even if it wins, it's pretty much impossible to distinguish luck from skill: Luck versus Skill in Mutual Fund Performance .
Since large low cost index funds are not subject to the vagaries of active management, it seems reasonable to infer that true α for a portfolio of these funds is close to zero. In other words, going forward we expect that a portfolio of low cost index funds will perform about as well as a portfolio of the top three percentiles of past active winners, and better than the rest of the active fund universe.
Kevin
Just in case: Fama, the father of EMH, is a director in DFA, a quant shop.
Kevin M wrote:Sounds like a bunch of gobbledygook to me.
Argument 1: What does Vanguard know that all the other super-smart institutionally-employed quants don't know?
Argument 2: The academic evidence (not to mention simple arithmetic) seems to overwhelmingly indicate that active management loses, and even if it wins, it's pretty much impossible to distinguish luck from skill: Luck versus Skill in Mutual Fund Performance .
Since large low cost index funds are not subject to the vagaries of active management, it seems reasonable to infer that true α for a portfolio of these funds is close to zero. In other words, going forward we expect that a portfolio of low cost index funds will perform about as well as a portfolio of the top three percentiles of past active winners, and better than the rest of the active fund universe.
Kevin
Just in case: Fama, the father of EMH, is a director in DFA, a quant shop.
Not sure that "quant shop" is the right description. DFA offers funds that are passively managed (at least compared to what are typically described as actively managed funds), although they do use a number of criteria to filter the stocks they include to improve efficiency, and of course their funds integrate the academic findings of Fama and French.
Kevin
If I make a calculation error, #Cruncher probably will let me know.
Kevin,
Your description is correct, they use Fama's academic work to tilt their funds in order to improve performance beyond total market. That to me is quantitative work, not different from Arnold's Research Affiliated. In fact, you must agree that the entire passive investing industry is moving in that direction under the Smart Beta name.