How strong is your belief in AQR?

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AndroAsc
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How strong is your belief in AQR?

Post by AndroAsc » Thu Apr 14, 2016 7:41 pm

First, I'm upset the poll option is gone. So I guess we're down to counting posts.

I'm sure a good number of you are aware of AQR and their smart beta passive funds. I'll lump AQR with similar companies like DFA. In comparing AQR/DFA to Vanguard, how strong is your belief?

Let's assume access to AQR/DFA funds are not an issue, and are as accessible as Vanguard. What would you do then?

I can think of a few broad categories:
A) You will not take any and stick to traditional Vanguard index funds.
B) Use specialty AQR/DFA fund like QSPIX(?) the alternative fund style that is supposedly uncorrelated to traditional stock bonds. But keep this below ~20% of your portfolio.
C) Will switch 50% of funds to AQR/DFA, by finding their "counterpart" to Vanguard funds, but you'll split them almost 50:50 evenly.
D) Will switch entirely to AQR/DFA funds. Cause you know the factors stuff is going to work out in the long run (many decades).

For the record, I'm in category B, although I have not made the move yet. Admittedly, I am still somewhat skeptical, but I fully confess I haven't have time to do my research. So my default response is to be cautious. Nevertheless, about a small portion of my portfolio is into stuff like REITs, commodities and other non-conventional things, and I am wondering if that might be worth replacing with AQR funds.

I'm also interested to hear from those in category A and D, the extreme ends. What makes you think that AQR/DFA will or will not outperform vanilla index in the long run?
Last edited by AndroAsc on Fri Apr 15, 2016 11:38 am, edited 1 time in total.

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Re: How strong is your belief in AQR Kool-Aid?

Post by nisiprius » Thu Apr 14, 2016 8:58 pm

I think you should probably reword your thread title--you can edit it yourself--because when you call it "AQR Kool-Aid" that sure sounds like a negative value judgement!
AndroAsc wrote:...B) Use specialty AQR/DFA fund like QSPIX(?) the alternative fund style that is supposedly uncorrelated to traditional stock bonds. But keep this below ~20% of your portfolio. For the record, I'm in category B...
Larry Swedroe, who thinks highly of this fund, I think said that he himself had only put 3% of his portfolio into it. Although he might had said later that he had increased it.
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Re: How strong is your belief in AQR Kool-Aid?

Post by timboktoo » Thu Apr 14, 2016 9:03 pm

I plan to stick with the Three Fund Portfolio myself, but I can see the appeal of including a fund such as this. I have some thoughts, but keep in mind when you read them that I am outside of my circle of competence on this subject. If Larry or someone else points out a flaw in my reasoning, I'd be grateful for it.

My first thought is that if Larry likes this fund, then it's got to have some merit to it. It gives the fund credibility to me.

My second thought on the fund is where things probably go a bit unclear for me. If I am correct (and that's a big IF) AQR bets on factors. So, it's taking a different kind of risk than market risk. To my understanding, betting on something like a factor would mean that you're basically betting that a relationship witnessed in the marketplace will continue to re-appear more often than not. Like betting on the market itself is a long-term bet that the trend will be upward, betting on factors themselves is a long-term bet that certain factors will continue to thrive in the long-run.

This seems problematic to me.

First, I'm not a value investor. Although I really wanted to go in that direction and I love Buffett, I don't hold to the belief that value will continue to provide alpha over growth. In my very uneducated opinion, we can learn things from investing history, but we can't expect them to be repeated. This isn't a laboratory. I can't count on value premium to persist just because it shows up in back-testing as a clear winner. In this, I may be terribly wrong. And being right to the fullest in this has implications that are much larger than questions of value premiums. Followed to its conclusion, completely believing that the past shouldn't inform my future investing planning would make it pretty much impossible for me to come up with an asset allocation or calculate how much I need to save. The future being unknowable is incredibly disadvantageous, isn't it.

Anyway, if I don't personally believe that a value premium will exist, then it seems logical to me that betting on value as a factor is unwise. I might be grossly misunderstanding what a factor truly is, though, and I realize that AQR would likely be making multiple bets on multiple factors in some attempt at diversification. I definitely appreciate that the correlation of a fund such as this would be low to Total Stock Market, and so I can see how it would be great as an additional asset in a portfolio if the factors it bets on persist and it is still able to make profitable bets on them. I want to believe in this as much as I want to believe in Value, but I have never been able to make the leap.

It's extremely contradictory to believe that the past shouldn't inform my investment decisions, that I don't know the future, and that all I have to look at to make my decisions is the past. I sometimes wonder if the lessons we've learned are even right. Until I can gain some clue, I'll keep holding the Three Fund Portfolio.

Please feel free to poke holes in my post. I'm always hoping to learn from other perspectives.

[Edit: When talking about AQR above, I mean QSPIX]

- Tim
Last edited by timboktoo on Fri Apr 15, 2016 9:14 am, edited 1 time in total.

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Re: How strong is your belief in AQR Kool-Aid?

Post by lack_ey » Thu Apr 14, 2016 9:20 pm

A lot of people tilt to factors, sometimes heavily, via long-only funds from Vanguard and other non-AQR/DFA providers. Some avoid the "specialty" funds because of costs, risks, or other concerns, rather than qualms about the underlying motivations. Could you clarify what you really mean to ask about?

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Re: How strong is your belief in AQR Kool-Aid?

Post by Alchemist » Fri Apr 15, 2016 12:40 am

I value simplicity and focus. This keeps me in vanilla index funds. I own two, FUSVX (S&P 500 index fund) in my Roth and VTSAX (Total US stock market) in taxable.

Diverging into tilts, factors, and endless types of asset classes just isn't for me. Simplicity is what helps me sleep at night, and keeps me from fiddling around with my investments and possibly making a mistake. Maybe DFA/AQR type funds will out perform TSM/S&P 500. If they do, it won't bother me. What would bother me is tracking error if I tilted my portfolio, which would lead me to be very susceptible to behavior errors that are far more costly than any tilt could make up for. Additionally in general I am a 'factor skeptic' and have little faith in them continuing to out perform. I won't be surprised if they do, but I won't be surprised if they don't. Thus I keep my money away from them.

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Re: How strong is your belief in AQR Kool-Aid?

Post by nisiprius » Fri Apr 15, 2016 6:55 am

I think we need to draw an absolute, hard-and-fast, never-get-them-confused distinction between:

a) Long-only funds--like all of DFA's, I think, and some of AQR's, such as AQR Large Cap Defensive Style Fund, AUEIX, and, I think, most of the "fundamental index" funds (Schwab Fundamental Index, Fidelity Enhanced Index, Wisdomtree's ETFs) and "smart beta" funds.

These funds invest in broadly diversified portfolios of stocks and invest according to some kind of fixed rule. The number of stocks held by these funds is, let's say, 200 or more. Morningstar puts them in simple, familiar categories such as "large growth." There are no concentrated "stock picks," there is no talk about "high conviction" or "concentrated positions," they don't put 30% of their assets into Valeant or anything like that. They do seek to beat the index or something, but if you call the simpler old strategies "tilts," then these are "gentle rolling landscapes."

Expenses seem to run in the 0.25%-0.5% range, higher than my favorite Vanguard funds, but still in the zone that Morningstar calls "low," not like the 1.35% of QSPIX.

They are trying to get an edge, not make a killing. Maybe under the hood they are trying to take advantage of low correlation between components, but overall the funds themselves still have high correlation with the market. They are sort of like the active "closet index funds" that don't differ much from the index, but you're not paying 1%-ballpark active-fund fees for them.

For example: DFA US Large Company Portfolio, DFUSX (blue); PowerShares RAFI U.S. 1000, PRF (orange), ; Fidelity Large-Cap Core Enhanced Index, FLCEX (green); and Vanguard 500 Index Fund, yellow. Time period = since inception of youngest fund, FLCEX. I didn't include any AQR funds because they haven't been out for more than a few years.
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What can be said of these funds is that if you're convinced, in the past it doesn't look as if it has cost you much, nor have you been exposed to any great risk, in backing your conviction. "There might be something to it," maybe it really is better to throw in some gentle tilts and weak concentrations and a small dose of tactical asset allocation. And because they haven't been hugely different in behavior from an index fund, the risk of losing patience during a period of underperformance and selling, only to miss a later period of outperformance, doesn't seem too large.

Yes, if I decided to use one of these I would think of them as being a replacement or an alternative to a Vanguard index fund. I don't think it would be dipping in a cautious toe with 5% of my portfolio, I think they are basically plug-in alternatives to an index fund--much as an active believer might invest in Fidelity Contrafund instead of an index fund.

In this view, Vanguard index funds--well, they index. The slavishly track the index. Rock-bottom costs, minimal tracking error. Pro forma exposure to the traditional "size" and "value" factors is available in Vanguard's set of nine index funds, but the factor connoisseurs think they are inferior, cheap, shoddy goods.

DFA has had a long, deep commitment to providing tools for Fama-French-factor-informed investing. They don't have funds with names suggesting focussed tools for the trendy newer factors. Larry Swedroe has said they are well aware of momentum and all the rest but whatever they think about it and do about it is baked into their existing funds. The funds have names like "DFA US Small-Cap Value Portfolio." Since they're not index funds, they can throw in a dash of momentum or whatever.

Maybe some of AQR's long-only funds could be regarded as "power tools for the trendy, new factors."

b) Long-short funds that use short positions and leverage. Like QSPIX, of course. I think this is a completely different flavor of Kool-AId from the long-only funds and I think it's really important to draw a distinction. On a spectrum where mutual funds are at one end and hedge funds are at the other end, these are some of the hedgiest mutual funds, and, darn it all, they remind me of the 130/30 funds which were so disastrous that they've been all but forgotten. The 130/30 funds were actively managed, to be sure. They were extremely highly touted circa 2006 and 2007, and were confidently proclaimed to reach $3 trillion very soon and to all but supersede long-only funds.

Now QSPIX's advocates would say that's a totally unfair comparison because QSPIX is following quantitative rules, not managers' gut feelings about what stocks to short, and that the leverage is OK because they know just what they're doing.

The lure of the long-short approach is that factors don't actually exist in the wild. They are mathematical calculations that involve a subtraction. Therefore, no long-only fund can attain a very high loading on any factor. In order to get the purest, strongest, most effective factor exposure and to make use of some of new, fashionable factors, you have to perform that subtraction, meaning short positions... and since the effect is small, you need to lever it up to make it matter.
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Re: How strong is your belief in AQR Kool-Aid?

Post by sunnywindy » Fri Apr 15, 2016 7:31 am

1. Not enough time data on AQR funds for me to trust their methods. I have read some of their papers (and enjoyed them) and I do like listening to what Cliff Asness has to say, but it's not the type of company I give my money to. Also, I wouldn't buy a long/short factor fund because I don't have that strong of a conviction on what factors I want to target. (I would possibly go for an MSCI or FTSE factor-lite index, though.)

2. I would buy a DFA fund, but I think the tracking error + extra cost would bother me somewhat, so it would have to be in a satellite position.

3. I am an ETF guy (when possible) and I was interested in the DFA/John Hancock ETF's. But, an ER of 0.35% on a US large cap fund seems like a rip off to me, so that's a no go. I'll stick with Vanguard Total Stock Market (VTI).

Overall, my factor philosophy aligns most closely with Joel Dickson of Vanguard where he recommends finding the 'active' in passive vehicles such as mixing various ETF's to get the factor exposure you want, but at a much lower price.
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Re: How strong is your belief in AQR Kool-Aid?

Post by Robert T » Fri Apr 15, 2016 8:31 am

.
IMO there are two parts to this:

1. What ‘factors’ do you believe in?
  • Asness/AQR has made a significant contribution to research in this area. IMO - key research articles on this are:

    1993 Common risk factors in the returns on stocks and bonds – Fama/French - 5 risk factors: market, size, value, term, default
    2013 Value and momentum everywhere – Asness, Moskowitz, Pedersen
    (would also note Asness’s earlier 1997 article on “The Interaction of Value and Momentum Strategies”).

    I have less confidence in the ‘quality’ factor (given the combination of: the broad range of definitions used, low correlations among them, lack of an apparent 'risk' story, and switching signs of ‘quality factors’ in factor regressions).
2. How do you structure a portfolio to achieve your desired factor tilt (at lowest cost)?
  • There are many ways to achieve a particular desired factor tilt e.g. ishares, Vanguard, Powershares, DFA, AQR, Bridgeway etc… Where to begin? When should you change funds? FWIW I use a simple ‘checklist approach’ (along the lines of Atul Gawande). Unlike some of the guru value investors such as Mohnish Pabari who has about 100 questions on his checklist (for stocks), I have 3, around: (i) will inclusion of a particular fund in my portfolio lower the cost of achieving my factor load targets? (ii) what is the current AUM of the fund (higher AUMs reduce the risk of fund closure)? And (iii) is the fund company reputable (years in business, track record against factor benchmarks, etc)?
In this respect I have an ETF portfolio (for retirement), and DFA portfolio (for 529). I do however also like the long-only AQR Multi-style offerings, and it will be interesting to see the tax efficiency of the tax-managed versions recently launched (2/11/15).

Robert
Last edited by Robert T on Fri Apr 15, 2016 1:50 pm, edited 2 times in total.

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Re: How strong is your belief in AQR Kool-Aid?

Post by zaboomafoozarg » Fri Apr 15, 2016 8:53 am

5% of total AA

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Re: How strong is your belief in AQR Kool-Aid?

Post by midareff » Fri Apr 15, 2016 8:53 am

Simple answer.... not strong enough.

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Re: How strong is your belief in AQR Kool-Aid?

Post by FillorKill » Fri Apr 15, 2016 8:55 am

I'd consider both....
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Re: How strong is your belief in AQR Kool-Aid?

Post by AndroAsc » Fri Apr 15, 2016 11:44 am

lack_ey wrote:A lot of people tilt to factors, sometimes heavily, via long-only funds from Vanguard and other non-AQR/DFA providers. Some avoid the "specialty" funds because of costs, risks, or other concerns, rather than qualms about the underlying motivations. Could you clarify what you really mean to ask about?
It is true that many of us here tilt to factors especially small and value, which were like the original two. I do SV tilt because I understand it, and implementation wise it is very similar to normal index funds, perhaps slightly higher turnover for SV, but that's it.

My question is with the other relatively newer factors popping up, mostly being pushed by AQR, things like momentum, profitability, etc. I know that these factors are backed up by research, not as much as SV, but seemingly a sufficient amount. Execution wise, there seems to be some more exotic elements like leverage involved.

My real question is how strong is your belief in AQR, if you had the chance to get their funds?
Is AQR what DFA was when it was first launched? I would think that when the entire value tilt business of DFA was new, and there was lots of skepticism, but over time it seems to have worked out. So is AQR the next DFA? Or is it going to be the next LTCM?
Last edited by AndroAsc on Fri Apr 15, 2016 11:50 am, edited 1 time in total.

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Re: How strong is your belief in AQR Kool-Aid?

Post by AndroAsc » Fri Apr 15, 2016 11:50 am

nisiprius wrote:Larry Swedroe, who thinks highly of this fund, I think said that he himself had only put 3% of his portfolio into it. Although he might had said later that he had increased it.
With 3% does it even make a difference in the entire portfolio? I was under the impression that you need at least 5-10% in an alternate asset class to make it worthwhile...

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Re: How strong is your belief in AQR Kool-Aid?

Post by lack_ey » Fri Apr 15, 2016 12:38 pm

AndroAsc wrote:
lack_ey wrote:A lot of people tilt to factors, sometimes heavily, via long-only funds from Vanguard and other non-AQR/DFA providers. Some avoid the "specialty" funds because of costs, risks, or other concerns, rather than qualms about the underlying motivations. Could you clarify what you really mean to ask about?
It is true that many of us here tilt to factors especially small and value, which were like the original two. I do SV tilt because I understand it, and implementation wise it is very similar to normal index funds, perhaps slightly higher turnover for SV, but that's it.

My question is with the other relatively newer factors popping up, mostly being pushed by AQR, things like momentum, profitability, etc. I know that these factors are backed up by research, not as much as SV, but seemingly a sufficient amount. Execution wise, there seems to be some more exotic elements like leverage involved.
Again, as many people have alluded to, there are two major components: research and implementation.

The research and academic understanding (or lack thereof) of factors beyond value and size go back decades, albeit with greater interest perhaps in the last decade or two. If you want to talk about momentum, profitability, low beta, etc. you are speaking to a movement far beyond AQR. These days, as far as asset managers go, many competitors offer funds based on momentum, profitability, and factors other than size and value. Let's call these extended factors as opposed to traditional factors.

As far as implementation goes, AQR offers both long-only equity funds based on factors as well as long/short equity and long/short across multiple asset classes, some of which are based on the same factors and some doing other things.

Some people tilt to traditional factors with long-only funds. Some tilt to extended factors too but also only with long-only funds. Some tilt to traditional factors in part with long/short funds. Some tilt to extended factors too also including usage of long/short funds. Of course, many don't attempt to tilt any ways at all.

Within these categories there are both AQR and non-AQR funds. DFA largely does long-only tilts to traditional factors (though with mild momentum, profitability screens, to supplement value with profitability and keep negative momentum out of funds).
AndroAsc wrote:My real question is how strong is your belief in AQR, if you had the chance to get their funds?
Is AQR what DFA was when it was first launched? I would think that when the entire value tilt business of DFA was new, and there was lots of skepticism, but over time it seems to have worked out. So is AQR the next DFA? Or is it going to be the next LTCM?
I can't tell what you mean by "belief in AQR." Is that belief in extended factors, which many besides AQR espouse? Belief in leverage, shorting, derivatives, and other tools that can be used in the pursuit of factor strategies? Belief in AQR's particular implementation of long-only funds being superior to that of others? Belief in AQR's particular implementation of long/short funds being superior to that of others?

AQR has been in business since the late 90s. They've offered mutual funds for several years now. There are many other asset managers doing somewhat similar things in some spaces.

It's already clear that AQR is the next (has been the next) DFA in a few ways, including the academic bent and relationship to the University of Chicago and Fama. They are different in that they pursue extended factors, non-factor strategies, and use leverage and shorting in some funds. Also, even their long-only stock funds are generally more expensive than DFA's funds. They also started out and are still big in hedge funds and institutional management. They've survived much longer than LTCM did and employ far different strategies from them and with much lower leverage, albeit enough to suffer 50%+ losses in the quant/financial crisis era in their flagship hedge fund.


AndroAsc wrote:
nisiprius wrote:Larry Swedroe, who thinks highly of this fund, I think said that he himself had only put 3% of his portfolio into it. Although he might had said later that he had increased it.
With 3% does it even make a difference in the entire portfolio? I was under the impression that you need at least 5-10% in an alternate asset class to make it worthwhile...
The more different an asset, the less of it you need to make a difference. You can think of it as the factor loadings being much higher per dollar invested, or something like that.

Here's a very brief snapshot as an illustrative example (probably won't work this way in the long run, not with these exact numbers). Portfolio 1 is the 3-fund portfolio. Portfolio 2 tilts its US equities via factor funds. Portfolio 3 uses 3% of that style premia fund instead:
https://www.portfoliovisualizer.com/bac ... ount=10000

Nevertheless, 3% is still a small amount. You do have to consider that I think the majority of his allocation is fixed income (and the safest issues, no less), though.

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Re: How strong is your belief in AQR?

Post by Yesterdaysnews » Fri Apr 15, 2016 12:50 pm

Last few years I have held several AQR funds in my Fido IRA. They have done really, really well. To be truthful, however, that makes me nervous as I believe in mean reversion. They are also expensive. Overall, I am thinking to get out while I am way ahead and put that money in a decent intermediate term bond fund instead. AQR has delivered amazing returns in some funds last few years (market neutral, long-short equity, qspix) but there is no telling if they have discovered some secret sauce or just had some good luck.

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Re: How strong is your belief in AQR?

Post by abuss368 » Fri Apr 15, 2016 12:55 pm

I am unfamiliar with AQR. In fact I am not sure what that means.

I will add that moving our investment portfolio to Vanguard was the best financial decision we ever made.

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Re: How strong is your belief in AQR?

Post by lack_ey » Fri Apr 15, 2016 12:57 pm

Yesterdaysnews wrote:Last few years I have held several AQR funds in my Fido IRA. They have done really, really well. To be truthful, however, that makes me nervous as I believe in mean reversion. They are also expensive. Overall, I am thinking to get out while I am way ahead and put that money in a decent intermediate term bond fund instead. AQR has delivered amazing returns in some funds last few years (market neutral, long-short equity, qspix) but there is no telling if they have discovered some secret sauce or just had some good luck.
A lot of good luck to be sure. But note that mean reversion is probably weaker than you think in financial markets and is even weaker for long/short allocations and factors. High or low valuations in stocks as a whole aren't even that predictive of future returns; when you're talking about high recent performance for a long/short allocation that shifts its constituents over time (consider that past contributors to performance may already be sold off), the link is even more tenuous. On the flip side that means if this stuff tanks you shouldn't expect it to necessarily rebound either.

That is, market timing is hard, and some things may be even harder to market time than others.

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Re: How strong is your belief in AQR?

Post by Yesterdaysnews » Fri Apr 15, 2016 1:08 pm

That's an interesting point and I agree that it is possible AQR has found a formula that will produce spectacular returns going forward. However, there is decent chance they won't. I am conflicted as whether I should ditch their funds for something less expensive, as that is guaranteed return in the form of cost savings.

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Re: How strong is your belief in AQR?

Post by lack_ey » Fri Apr 15, 2016 1:34 pm

I'm just saying that luck plays a role, luck probably contributed to the magnitude of recent outperformance (this level isn't sustainable), but you shouldn't necessarily assume mean reversion going forward. They will get crushed at other times as in the past but nobody knows when and by how much, and it's not much more likely after a period of high returns.

It's changing allocations based on recent performance that makes me nervous. If the philosophy and strategy were to pay heavy fees for potential sources of return not very correlated with traditional markets, there's no reason to change that on account of anything that's transpired. What changed in your understanding of asset allocation and how financial markets work?

FWIW I think the weightings you talked about elsewhere were pretty extreme and wouldn't go that heavily no matter what kind of performance we've seen.

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Re: How strong is your belief in AQR?

Post by HomerJ » Fri Apr 15, 2016 1:38 pm

I wouldn't invest a dime with this guy. Article from 2009

http://www.wsj.com/articles/SB124303417991748685
Mr. Asness, 42 years old, has seen a number of changes over his long career managing money. But he had never seen a market quite like the one that pounded his hedge fund in the past year and a half.

He isn't entirely new to tough times. Soon after launching in 1998, AQR hit a stretch of losses. Its value-oriented strategies suffered amid the dot-com bubble, when expensive stocks rallied while old-world, cheap stocks struggled. The firm was just a few months from shutting down.

After the bubble popped in 2000, AQR's fortunes turned up, and investors piled in. The next several years proved to be a golden age for hedge funds. Assets under management in the industry ballooned to $1.9 trillion in 2007 from $491 billion in 2000, according to Hedge Fund Research.

By mid-2007, AQR had amassed nearly $40 billion in assets. The firm was on the verge of launching an initial public offering, a move that would have reaped a fortune for its founders.

Then in August 2007, AQR and a number of other quantitative funds suffered losses as the subprime credit crunch spread through the financial system.

AQR was losing as much as $500 million in a single day during one tumultuous week early in the month, according to people familiar with the matter. The IPO was scuttled. Later that year, Mr. Asness frequently erupted in his office, smashing computer screens in anger, according to people familiar with the matter. Mr. Asness confirmed the account.

Still reeling from those losses, AQR made a big wager in early 2008 that U.S. stocks would rise. But the stock market kept falling. The fund also made misplaced bets on the direction of interest rates, currencies, commercial real estate, commodities and convertible bonds, among other strategies.
Basically, he sets up models based on historical data.

In the late 90s, he made bets against the market, because in the past, the markets had never risen that high. His firm was "just a few months from shutting down".

In 2008, the market did something that he had never seen before, and his fund experienced huge losses.

Now, he's created a new fund based on historical data. And as long as history repeats, it will do well. But if something happens that his models haven't seen before (as has happened TWICE now for this guy), his fund will probably lose a bunch of money.

And he will smash computer monitors because he's so angry that unknown variables actually exist in the real world. Maybe he will bounce back like the other two times, or maybe the next unforeseen event will be one that will last 3 months too long, and his fund will fold.

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Re: How strong is your belief in AQR?

Post by Yesterdaysnews » Fri Apr 15, 2016 1:56 pm

lack_ey wrote: FWIW I think the weightings you talked about elsewhere were pretty extreme and wouldn't go that heavily no matter what kind of performance we've seen.
Agreed -- my allocations to ALTs have been too high although have paid off extremely well, and I believe it is time to look at getting out while I am way ahead and settle into a more traditional index-based portfolio. There is just too much unknown with these new products when thinking about an investment timeline of several decades ahead.

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Re: How strong is your belief in AQR?

Post by Solo Prosperity » Fri Apr 15, 2016 2:31 pm

HomerJ wrote:Basically, he sets up models based on historical data.
So do we all. A vanilla U.S. 60/40 portfolio is based on the positive historical data so a lot of people do it and we all expect and "hope" that it will continue to work. There are no guarantees in any allocation. Japan's stock market is still down 50% from there highs back in 1989...26 years and counting. Do I expect that to happen to the U.S. stock market? No...but at the end of the day, all I can do is hope that it doesn't. That is how we all invest.
HomerJ wrote:In the late 90s, he made bets against the market, because in the past, the markets had never risen that high. His firm was "just a few months from shutting down".
He has a strong belief in the value premium (as well as momentum and quality) from all of his academic research which means most of their funds are heavily tilted towards it...Value under-performed heavily in the 90's. Ask Buffett or any other value tilted investor how their portfolio's performed in the 90's versus the S&P 500 index. The 90's were a very rough period for value investors as a whole, not just AQR. It was a risky strategy, but I give him kudos for sticking to it amid tons of pressure from investors I am sure.
HomerJ wrote:In 2008, the market did something that he had never seen before, and his fund experienced huge losses.
No one had really seen it before since the last episode like this on a global scale was back in the Great Depression. I don't care who you are, even a U.S. index investor in something like VTI experienced a peak to trough loss of greater than 50% from late 2007 to early 2009 in that fund. Obviously a balanced portfolio did much better, but his funds are not balanced portfolio's. His equity portfolio's are designed to be used for the equity portion of a person's portfolio so of course they were down huge. Everyone was.
HomerJ wrote:Now, he's created a new fund based on historical data. And as long as history repeats, it will do well. But if something happens that his models haven't seen before (as has happened TWICE now for this guy), his fund will probably lose a bunch of money.
Again this goes for all of us. If the U.S. goes to hell in a hand-basket and the next 40 years produce terrible returns to which we all accept because we index and tilt heavily towards the U.S. it will be because it is something "the models haven't seen before". Almost all Equity funds have had 2 huge losses over this period. VTI was down over 50% from 07-09 and VINIX (VTI didn't start yet) was down almost 50% after the 2000-2003 bear market. Seems a bit hypocritical to say someone had two huge losses in the last 20 years, when EVERYONE's equity funds had two significant losses in the same time period...I'm willing to bet your equity funds did too.
HomerJ wrote:And he will smash computer monitors because he's so angry that unknown variables actually exist in the real world. Maybe he will bounce back like the other two times, or maybe the next unforeseen event will be one that will last 3 months too long, and his fund will fold.
I give him credit for admitting it at least. 99% of money managers would vehemently push-back on this story, even if they did the same thing. It shows me has some humility and actually cares about his models working.

I don't really care if you invest with AQR (I don't currently, but absolutely love their research papers) nor do I think Mr. Asness cares. I do think however that he is a really smart and honest guy from every interview or paper I have read from him, and it seems like he really does care about creating and crafting sound investment strategies for people. The nature of tilting away from the Market-Cap Index inherently means he is going to have periods where his funds have large tracking error, both negative and positive, but that doesn't necessarily mean he some quack.

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Re: How strong is your belief in AQR?

Post by Parallax » Fri Apr 15, 2016 3:40 pm

HomerJ wrote:I wouldn't invest a dime with this guy. Article from 2009

http://www.wsj.com/articles/SB124303417991748685
Mr. Asness, 42 years old, has seen a number of changes over his long career managing money. But he had never seen a market quite like the one that pounded his hedge fund in the past year and a half.

He isn't entirely new to tough times. Soon after launching in 1998, AQR hit a stretch of losses. Its value-oriented strategies suffered amid the dot-com bubble, when expensive stocks rallied while old-world, cheap stocks struggled. The firm was just a few months from shutting down.

After the bubble popped in 2000, AQR's fortunes turned up, and investors piled in. The next several years proved to be a golden age for hedge funds. Assets under management in the industry ballooned to $1.9 trillion in 2007 from $491 billion in 2000, according to Hedge Fund Research.

By mid-2007, AQR had amassed nearly $40 billion in assets. The firm was on the verge of launching an initial public offering, a move that would have reaped a fortune for its founders.

Then in August 2007, AQR and a number of other quantitative funds suffered losses as the subprime credit crunch spread through the financial system.

AQR was losing as much as $500 million in a single day during one tumultuous week early in the month, according to people familiar with the matter. The IPO was scuttled. Later that year, Mr. Asness frequently erupted in his office, smashing computer screens in anger, according to people familiar with the matter. Mr. Asness confirmed the account.

Still reeling from those losses, AQR made a big wager in early 2008 that U.S. stocks would rise. But the stock market kept falling. The fund also made misplaced bets on the direction of interest rates, currencies, commercial real estate, commodities and convertible bonds, among other strategies.
Basically, he sets up models based on historical data.

In the late 90s, he made bets against the market, because in the past, the markets had never risen that high. His firm was "just a few months from shutting down".

In 2008, the market did something that he had never seen before, and his fund experienced huge losses.

Now, he's created a new fund based on historical data. And as long as history repeats, it will do well. But if something happens that his models haven't seen before (as has happened TWICE now for this guy), his fund will probably lose a bunch of money.

And he will smash computer monitors because he's so angry that unknown variables actually exist in the real world. Maybe he will bounce back like the other two times, or maybe the next unforeseen event will be one that will last 3 months too long, and his fund will fold.

The biggest issue I have with articles like this is that they treat AQR as a single fund (and often referred to as a hedge fund). They have a multitude of strategy offerings; as such there will always be a time when one of their strategies is having a rough time.

All of those anecdotes impacted every manager that was investing in equities, and in particular, value equities, at those times. The only real issue was timeliness of an IPO.

My bias is that people should refrain from commenting on organizations like this unless they intimately know them. I, for example, visit AQR about every year.

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Re: How strong is your belief in AQR?

Post by HomerJ » Fri Apr 15, 2016 10:18 pm

QuietWealth wrote:
HomerJ wrote:Basically, he sets up models based on historical data.
So do we all. A vanilla U.S. 60/40 portfolio is based on the positive historical data so a lot of people do it and we all expect and "hope" that it will continue to work. There are no guarantees in any allocation. Japan's stock market is still down 50% from there highs back in 1989...26 years and counting. Do I expect that to happen to the U.S. stock market? No...but at the end of the day, all I can do is hope that it doesn't. That is how we all invest.
That's a very general prediction, as opposed to the more focused predictions he makes with his models for the various factors.
HomerJ wrote:In the late 90s, he made bets against the market, because in the past, the markets had never risen that high. His firm was "just a few months from shutting down".
He has a strong belief in the value premium (as well as momentum and quality) from all of his academic research which means most of their funds are heavily tilted towards it...Value under-performed heavily in the 90's. Ask Buffett or any other value tilted investor how their portfolio's performed in the 90's versus the S&P 500 index. The 90's were a very rough period for value investors as a whole, not just AQR. It was a risky strategy, but I give him kudos for sticking to it amid tons of pressure from investors I am sure.
He was just a few months from losing it all.. It's one thing to be a value investor; it's quite another to be so terrible at risk hedging that he nearly lost everything. His track record shows a ton of risk.
HomerJ wrote:In 2008, the market did something that he had never seen before, and his fund experienced huge losses.
No one had really seen it before since the last episode like this on a global scale was back in the Great Depression. I don't care who you are, even a U.S. index investor in something like VTI experienced a peak to trough loss of greater than 50% from late 2007 to early 2009 in that fund. Obviously a balanced portfolio did much better, but his funds are not balanced portfolio's. His equity portfolio's are designed to be used for the equity portion of a person's portfolio so of course they were down huge. Everyone was.
He claimed that HIS model was safer than equities. He invested in many factors back then too. And his models proved faulty. He lost MORE than equities.

And now he has NEW models, and everyone thinks he's a genius who can't lose. I really don't understand the blind faith here with his track record.

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Re: How strong is your belief in AQR?

Post by HomerJ » Fri Apr 15, 2016 10:23 pm

QuietWealth wrote:Seems a bit hypocritical to say someone had two huge losses in the last 20 years, when EVERYONE's equity funds had two significant losses in the same time period...I'm willing to bet your equity funds did too.
He almost went broke... a couple more months and he would have gone to zero. That's because of leverage. Very different from just buying and holding the Total Stock Market Index Fund.

Edit: Maybe not broke... That's the wrong phrase. but if the market hadn't turned around, he would have had to close up shop.

And he's using leverage in his new funds too.

His track record shows him taking large risks. His track record should scare people. Like I said, I wouldn't invest a dime with him. Many of the posters here seem think that the risk is minimal, when his track record shows the exact opposite.
Last edited by HomerJ on Sat Apr 16, 2016 12:31 am, edited 2 times in total.

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Re: How strong is your belief in AQR?

Post by in_reality » Fri Apr 15, 2016 11:20 pm

HomerJ wrote:Many of the posters here seem think that the risk is minimal, when his track record shows the exact opposite.
Or are they willingly taking the risk of investing in something which in theory is a more rewarding approach but that obviously entails a little faith?

Anyway, thanks for pointing AQR's track record out. Now I don't feel so bad about not having access to mutual funds and being unable to have a 3-5% allocation.

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Re: How strong is your belief in AQR?

Post by Solo Prosperity » Fri Apr 15, 2016 11:41 pm

I am not that familiar with the leverage story from the "quant crisis". Hedge funds of any sort are basically never on my radar so I don't know that story, but I don't doubt that he was over-leveraged and in some very crowded trades.

I know when they first opened shop and almost closed up from the jump, it was not a leverage story but was caused from going long "cheap" and short "expensive", which in the late 90's was an absolute disaster.

I think though that "going broke" as a money manager does not necessarily mean you lost a massive % from your investment's, so I think that may be exaggerating his downside performance a bit when you say he "almost went broke". When they talk about that stuff, it is from investor $'s in most cases. A manager could be down 25% from investments but if everyone pulls their money, they go "broke".

I am surprised to hear that he said his strategies are safer than equities. From the papers I have read from his shop, they seem to be pretty honest about their value and momentum strategies being risky and have a need to be stuck with for long periods.

Maybe the story they tell of their long only MFs is a different story than their HFs...not too sure.

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Re: How strong is your belief in AQR?

Post by HomerJ » Sat Apr 16, 2016 12:30 am

QuietWealth wrote:I think though that "going broke" as a money manager does not necessarily mean you lost a massive % from your investment's, so I think that may be exaggerating his downside performance a bit when you say he "almost went broke". When they talk about that stuff, it is from investor $'s in most cases. A manager could be down 25% from investments but if everyone pulls their money, they go "broke".
This is a fair point.

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Re: How strong is your belief in AQR?

Post by grap0013 » Sun Apr 17, 2016 7:07 am

AndroAsc wrote:
I can think of a few broad categories:
A) You will not take any and stick to traditional Vanguard index funds.
B) Use specialty AQR/DFA fund like QSPIX(?) the alternative fund style that is supposedly uncorrelated to traditional stock bonds. But keep this below ~20% of your portfolio.
C) Will switch 50% of funds to AQR/DFA, by finding their "counterpart" to Vanguard funds, but you'll split them almost 50:50 evenly.
D) Will switch entirely to AQR/DFA funds. Cause you know the factors stuff is going to work out in the long run (many decades).
I'm pretty close to D. If I only had access to DFA funds I would be very comfortable using all their tilted funds for 100% of my portfolio. I put AQR and Research Affiliates at a moderately close second. Neither has nearly as long of a timeframe of a reputation as DFA. The thing that bothers me the most about AQR is that they have high turnover strategies and they have no benchmarks. Therefore, it's hard to see what their implementation costs are and if they usurp the extra returns.

At any rate, you made me look. My portfolio is approximately:

Vanguard 35%
AQR 30%
Research Affiliates 25%
DFA 10%
There are no guarantees, only probabilities.

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Re: How strong is your belief in AQR?

Post by tarheel » Mon Apr 18, 2016 5:53 am

grap0013 wrote:
AndroAsc wrote:
I can think of a few broad categories:
A) You will not take any and stick to traditional Vanguard index funds.
B) Use specialty AQR/DFA fund like QSPIX(?) the alternative fund style that is supposedly uncorrelated to traditional stock bonds. But keep this below ~20% of your portfolio.
C) Will switch 50% of funds to AQR/DFA, by finding their "counterpart" to Vanguard funds, but you'll split them almost 50:50 evenly.
D) Will switch entirely to AQR/DFA funds. Cause you know the factors stuff is going to work out in the long run (many decades).
I'm pretty close to D. If I only had access to DFA funds I would be very comfortable using all their tilted funds for 100% of my portfolio. I put AQR and Research Affiliates at a moderately close second. Neither has nearly as long of a timeframe of a reputation as DFA. The thing that bothers me the most about AQR is that they have high turnover strategies and they have no benchmarks. Therefore, it's hard to see what their implementation costs are and if they usurp the extra returns.

At any rate, you made me look. My portfolio is approximately:

Vanguard 35%
AQR 30%
Research Affiliates 25%
DFA 10%
There you are grap0013! I was wondering when you would hit the thread! :beer

I am one of the Bogleheads in category D. I would say across all of our accounts, we're probably ~60% AQR and ~40% Vanguard. Most of the Vanguard part is owing to constraints in my 401k, and the dw's Roth IRA which is Vanguard.

I own all of the multi-style long only funds and have a 7.5% allocation to QSPIX.

I believe in broadly diversifying my factor exposure and this is a reasonable cost way to do it. I am 85/15 overall with a 0.4% ER across the entire portfolio. While I am no Larry, I have learned as much about AQR's strategies as possible and believe in what they are doing, as well as in Asness and company. I would also say I am a hardcore Swedroehead and Larry's endorsement of AQR goes a long way with me.

In the long run will the AQR tilting outperform simple beta? Don't know. But without the clear crystal ball the only logical strategy is diversification. AQR provides this in spades.

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Re: How strong is your belief in AQR?

Post by Robert T » Mon Apr 18, 2016 6:42 am

.
Just to note - 'tracking error' of the AQR International and EM Multi-style funds may be fairly large as they can significantly overweight one country - so would expect some periodic and perhaps fairly larger deviations in performance. So while the AQR intl. and em funds may provide more diversified factor exposure, they may provided more concentrated (less diversified) country exposure. Nothing wrong with this if it is what you want.

AQR's largest country exposure:

Japan
36% = AQR International Multi-style
23% = DFA International Value
23% = iShares MSCI EAFE

China
41% = AQR Emerging Markt Multi-style
16% = DFA EM Value
24% = iShares MSCI EM
.

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Re: How strong is your belief in AQR?

Post by heyyou » Mon Apr 18, 2016 11:57 am

Occasionally a small new star rises from the market's horizon. Near my retirement day, it was a collateralized commodity fund. Long ago, it would have been an S&P500 index fund. A very few of the new funds/fund companies will be durable, but most will fade away.

These days, I am wary of anything that offers above average performance. I'm good with average returns, minus low expenses. For those who want more portfolio growth than that, saving extra is what worked best for me. YMMV

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Re: How strong is your belief in AQR Kool-Aid?

Post by jginseattle » Mon Apr 18, 2016 9:31 pm

AndroAsc wrote:
nisiprius wrote:Larry Swedroe, who thinks highly of this fund, I think said that he himself had only put 3% of his portfolio into it. Although he might had said later that he had increased it.
With 3% does it even make a difference in the entire portfolio? I was under the impression that you need at least 5-10% in an alternate asset class to make it worthwhile...
In a Larry portfolio, 3% would be 10% of equities.

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Re: How strong is your belief in AQR?

Post by larryswedroe » Tue Apr 19, 2016 7:43 am

BTW, I'm now at about 5%, likely moving higher over time as bonds in tax advantaged accounts mature, especially if real rates stay negative
Larry

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Re: How strong is your belief in AQR?

Post by Quark » Tue Apr 19, 2016 8:10 am

larryswedroe wrote:BTW, I'm now at about 5%, likely moving higher over time as bonds in tax advantaged accounts mature, especially if real rates stay negative
Larry
I thought I'd read a post in which you said you weren't increasing equity allocation, due to no need to take additional risk. If so, has your view changed in light of negative real rates?

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Re: How strong is your belief in AQR Kool-Aid?

Post by grap0013 » Wed Apr 20, 2016 7:37 am

jginseattle wrote:
AndroAsc wrote:
nisiprius wrote:Larry Swedroe, who thinks highly of this fund, I think said that he himself had only put 3% of his portfolio into it. Although he might had said later that he had increased it.
With 3% does it even make a difference in the entire portfolio? I was under the impression that you need at least 5-10% in an alternate asset class to make it worthwhile...
In a Larry portfolio, 3% would be 10% of equities.
I think the absolute dollars are more important than percentages. Let's say Larry's 5% QSPIX nets him an extra 30 basis points overall. If your portfolio is worth 10 million that's an extra 30K vs. if your portfolio is 100K then 30 basis points is only $300. I think "the extra hassle" is likely worth it for Larry on an absolute dollar value level. Most people probably not.
There are no guarantees, only probabilities.

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Re: How strong is your belief in AQR?

Post by SnowSkier » Wed Apr 20, 2016 6:58 pm

grap0013 wrote: At any rate, you made me look. My portfolio is approximately:
AQR 30%
larryswedroe wrote:BTW, I'm now at about 5%, likely moving higher over time as bonds in tax advantaged accounts mature, especially if real rates stay negative
Larry
How strong is my belief in AQR?...approach, process, people, parent, etc...

My portfolio is approx 10% AQR.

I took this from the fixed income side of my asset allocation, and I'm using AQR funds that have decent expected returns and are very un-correlated with equities and bonds, like QMNIX and QSPIX.

Would prefer a lower expense ratio of course.

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Re: How strong is your belief in AQR?

Post by matjen » Thu Apr 21, 2016 2:20 pm

My belief in AQR is second only to Vanguard. It is tied with DFA at #2. There really isn't a #3 for me. Having said that I am only really interested in and invested in QSPIX as I also own a fair amount of DFA for more traditional factor tilted holdings.

AQR's QSPIX is 5% of my portfolio.
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Re: How strong is your belief in AQR?

Post by betablocker » Mon Apr 25, 2016 11:41 am

I'm curious if we are seeing a shift or should see a shift in the traditional portfolio/asset allocations that people like Larry Swedroe, Rick Ferri, and Bill Bernstein would recommend based on the emerging research that AQR and others are putting into practice. From what I've read, traditional long only funds aren't the most efficient and low cost way to access factors like momentum, value, quality, etc. If the goals are to only take the risk you can, need, and should take; to be compensated for the risk you do take; and to take that risk in the most efficient and cost effective way possible, it seems like AQR is pointing the way forward with multi factor blends, long short strategies, etc. Could it be that the 60/40 portfolio needs to be rethought? Should it just be long only blend and factor tilt funds with safe bonds or is there a new paradigm emerging here?

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Re: How strong is your belief in AQR?

Post by lack_ey » Mon Apr 25, 2016 12:06 pm

betablocker wrote:I'm curious if we are seeing a shift or should see a shift in the traditional portfolio/asset allocations that people like Larry Swedroe, Rick Ferri, and Bill Bernstein would recommend based on the emerging research that AQR and others are putting into practice.
It's not really emerging research. The core components are decades old, at least for the popular style premia fund and most of their others. Some a little less so on the fringes, like thinking about how to manage all these things together, and the other work that hasn't found its way into the mutual funds.
betablocker wrote:From what I've read, traditional long only funds aren't the most efficient and low cost way to access factors like momentum, value, quality, etc.
I don't think so, not if you have offsetting exposures elsewhere. All else equal you shouldn't want to have one fund short something that you own in another fund (for example, a total market index). If fund 1 is 50% A, 50% B and fund 2 is 100% A, -100% B, and your asset allocation is 80% fund 1 and 20% fund 2, then your overall exposure is 60% A, 20% B. You're better off getting that mix via a long-only fund to save on transaction costs and frictions, never mind the higher fees with fund 2.

Now, if you're net short some positions, that's not achievable with long-only funds.

It depends on what you're going for and why.

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Re: How strong is your belief in AQR?

Post by Oliver » Tue Apr 26, 2016 7:27 pm

Robert T wrote:.
Just to note - 'tracking error' of the AQR International and EM Multi-style funds may be fairly large as they can significantly overweight one country - so would expect some periodic and perhaps fairly larger deviations in performance. So while the AQR intl. and em funds may provide more diversified factor exposure, they may provided more concentrated (less diversified) country exposure. Nothing wrong with this if it is what you want.

AQR's largest country exposure:

Japan
36% = AQR International Multi-style
23% = DFA International Value
23% = iShares MSCI EAFE

China
41% = AQR Emerging Markt Multi-style
16% = DFA EM Value
24% = iShares MSCI EM
.
I have 25% of my total portfolio invested in AQR funds. However, I have decided to cap my investment in AQR emerging markets multi-style due to a concentrated allocation to one country ( China) and the 10 largest holding accounting for 29% of the portfolio (261 stocks in fund).
Last edited by Oliver on Thu Apr 28, 2016 11:55 pm, edited 1 time in total.

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Re: How strong is your belief in AQR?

Post by LikeYouImagine » Thu Apr 28, 2016 4:28 pm

I'm in the D category with AQR. I'm using QRHIX, QLEIX, QMHIX, QICLX, QEELX, and QSMLX. I went full AQR over the past year.

Previously, I was using DFA Targeted Value to tilt towards domestic small-cap value, WisdomTree Small-Cap Developed (DLS) for international small-cap value, and Spartan US Bond for bonds. I'd say this thinking reflected my financial understanding from my mid-twenties from around 2008-2010. I was trying to minimize costs and enamored with the idea of extra returns from a small-cap value tilt. My wife understood these ideas as well.

Last year I was looking for a substitute for DFA's Targeted Value and wanted to incorporate the diversification ideas found in the Permanent Portfolio. I found references to Bogleheads using QSMLX and discovered AQR's fund line up from there. To better understand their funds, I read much of AQR's published papers and literature and read Antti Ilmanen's "Expected Returns". I already believed in the small and value factors for stocks, so it wasn't a big leap to believe in value, momentum, carry, and low volatility across multiple asset classes. I found Risk Parity appealing because of my interest in the Permanent Portfolio.

So now QRHIX is used as a base to access commodities, bonds, and large cap stocks. From there, I'm using QSMLX, QICLX, and QEELX to harvest beta plus long only stock factors. I recently chose QLEIX for accessing the short-side of each stock factor without completely sacrificing long only market upside. Plus, I hope for (but do not count on) returns from AQR's other less known factors or "alpha". Finally, I'm using QMHIX because I really like what I read about trend-following momentum strategies to diversify a portfolio.

My wife and I are still fairly young and realize these are all long term bets. I've also spent considerable time to educate my wife on what is now a considerably more complicated portfolio. She is comfortable with the ideas, except the "follow the herd" mentality in momentum investing. I'm a bit concerned about the higher level of counter party risk now, but I also want the leverage and short side of factor investing in QRHIX, QMHIX, and QLEIX.

Basically, I sleep better knowing I'm about a diversified as I can get while hopefully maintaining a high level of returns.

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Re: How strong is your belief in AQR?

Post by tarheel » Fri Apr 29, 2016 6:04 am

LikeYouImagine wrote:I'm in the D category with AQR. I'm using QRHIX, QLEIX, QMHIX, QICLX, QEELX, and QSMLX. I went full AQR over the past year.

Previously, I was using DFA Targeted Value to tilt towards domestic small-cap value, WisdomTree Small-Cap Developed (DLS) for international small-cap value, and Spartan US Bond for bonds. I'd say this thinking reflected my financial understanding from my mid-twenties from around 2008-2010. I was trying to minimize costs and enamored with the idea of extra returns from a small-cap value tilt. My wife understood these ideas as well.

Last year I was looking for a substitute for DFA's Targeted Value and wanted to incorporate the diversification ideas found in the Permanent Portfolio. I found references to Bogleheads using QSMLX and discovered AQR's fund line up from there. To better understand their funds, I read much of AQR's published papers and literature and read Antti Ilmanen's "Expected Returns". I already believed in the small and value factors for stocks, so it wasn't a big leap to believe in value, momentum, carry, and low volatility across multiple asset classes. I found Risk Parity appealing because of my interest in the Permanent Portfolio.

So now QRHIX is used as a base to access commodities, bonds, and large cap stocks. From there, I'm using QSMLX, QICLX, and QEELX to harvest beta plus long only stock factors. I recently chose QLEIX for accessing the short-side of each stock factor without completely sacrificing long only market upside. Plus, I hope for (but do not count on) returns from AQR's other less known factors or "alpha". Finally, I'm using QMHIX because I really like what I read about trend-following momentum strategies to diversify a portfolio.

My wife and I are still fairly young and realize these are all long term bets. I've also spent considerable time to educate my wife on what is now a considerably more complicated portfolio. She is comfortable with the ideas, except the "follow the herd" mentality in momentum investing. I'm a bit concerned about the higher level of counter party risk now, but I also want the leverage and short side of factor investing in QRHIX, QMHIX, and QLEIX.

Basically, I sleep better knowing I'm about a diversified as I can get while hopefully maintaining a high level of returns.
Boy that's an AQR portfolio! :beer Do you mind given approximate allocations? I was surprised to see using Portfolio VIsualizer that QRHIX, QMHIX, and QLEIX are actually almost uncorrelated. I always thought the alt strategies had some decent correlations.........and why no QSPIX?

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Re: How strong is your belief in AQR?

Post by LikeYouImagine » Fri Apr 29, 2016 3:03 pm

tarheel wrote: Boy that's an AQR portfolio! :beer Do you mind given approximate allocations? I was surprised to see using Portfolio VIsualizer that QRHIX, QMHIX, and QLEIX are actually almost uncorrelated. I always thought the alt strategies had some decent correlations.........and why no QSPIX?
My current allocations are about 30% QRHIX, 15% QLEIX, 10% QMHIX, 15% QSMLX, 15% QICLX, 15% QEELX.

I've thought quite a bit about QSPIX (before it closed). AQR current asset risk allocation for QSPIX is tilted heavily towards equities, in particular stock selection. Also, it appears they are betting more on value and momentum from that high stock selection and equity position. I'm expecting to receive quite a bit of value and momentum factors in stocks from QLEIX anyways and higher expected returns than QSPIX. I also wanted a decent sized allocation to QMHIX. AQR's paper A Century of Evidence on Trend-Following Investing really has stuck with me after reading it. In a way others papers from AQR did not. Particularly, Exhibit 2 and Exhibit 3 on page 4 highlight exactly what I'm looking for in an alternative investment product. When I looked at QSPIX, the benefit of additional diversification of carry and defensive in currencies, bonds, and commodities doesn't seem worth it when considering the overlap.

I will say that if I ever recommend an alternative style AQR product to anyone, it would be the successor to QSPIX. The style premia funds are nice "one stop shopping" for alternative investment products.

lack_ey
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Re: How strong is your belief in AQR?

Post by lack_ey » Fri Apr 29, 2016 3:35 pm

That is rather a lot to bet on one particular quant worldview of finance.

Untangling the ticker symbols...

30% QRHIX - AQR Risk Parity II HV (high volatility version, long stocks/bonds/currencies/commodities)
15% QLEIX - AQR Long-Short Equity (equity market neutral but with an overlay of ~0.5 beta via futures)
10% QMHIX - AQR Managed Futures Strategy HV (high volatility version, long/short trend following via futures across asset classes)
15% QSMLX - AQR Small Cap Multi-Style (long-only US equity, small/value/momentum/profitability)
15% QICLX - AQR International Multi-Style (long-only international equity, value/momentum/profitability)
15% QEELX - AQR Emerging Multi-Style (long-only emerging markets equity, value/momentum/profitability)

This is in tax-advantaged accounts, I assume? Looks like something around 60-65% long stocks. The long-short equity fund overlaps with the multi-style funds in chasing value, momentum, and profitability but throws other screens in there as well and isn't cap-weighted. Actually, I'm not convinced QLEIX isn't overlapping more there than QSPIX would be.

Looks like about 2.2x notional exposures relative to total $ invested, at least as of the end of March.

Here's a not-very-meaningful comparison of this allocation vs. a couple things a bit more conventional for Jan 2015-Mar 2016 (the weightings for portfolios 2 and 3 I just made up... pay them little heed):
https://www.portfoliovisualizer.com/bac ... ount=10000

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LikeYouImagine
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Re: How strong is your belief in AQR?

Post by LikeYouImagine » Fri Apr 29, 2016 4:50 pm

lack_ey wrote:That is rather a lot to bet on one particular quant worldview of finance.
...

This is in tax-advantaged accounts, I assume?....

Here's a not-very-meaningful comparison of this allocation vs. a couple things a bit more conventional for Jan 2015-Mar 2016 (the weightings for portfolios 2 and 3 I just made up... pay them little heed):...
This is all in tax-advantaged accounts. I ran lots of backtests with AQR's longer lived Risk Parity and Managed Futures funds. Here is a version scaled for the lower volatility funds and using RAFI for the long only funds:

https://www.portfoliovisualizer.com/bac ... ount=10000

I substituted the one portfolio for the Permanent Portfolio as well since it is a non traditional portfolio that I find interesting.

It shows about what one would expect given the poor performance of international equities, small value equities, and commodities.

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tarheel
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Re: How strong is your belief in AQR?

Post by tarheel » Sat Apr 30, 2016 6:14 am

I'm certainly intrigued by such a portfolio.....I always wonder what QSPIX-ers think about which would be the second AQR alternative fund they'd add. Maybe managed futures? This would be the devil on one of my shoulders.

The angel on my other shoulder says even with a ~60% allocation to AQR funds (rest Vanguard/Fidelity Spartan) my overall portfolio-wide ER is 0.4% and I am loathe to go much higher.....

So far the angel is winning the argument.

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Wade Garrett
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Re: How strong is your belief in AQR?

Post by Wade Garrett » Sun May 01, 2016 6:52 pm

tarheel wrote:I always wonder what QSPIX-ers think about which would be the second AQR alternative fund they'd add.
QMNIX (Equity Market Neutral fund). Even though it shares some similarities QSPIX. Both provide what I'm looking for in an alt fund.

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