Why [was] QSPIX steadily declining?

[typical.investor]

Incidentally, QSPIX didn't increase volatility.

Actually, yes I believe it did.

It isn't intended as a complete replacement for bonds in a portfolio, and Swedroe et al. never advocated it as such.

Not in his book perhaps but it was suggested in an article online where he suggested replacing bonds with alts which can provide the ballast against poor equity returns.

Here's what QSPIX has done when added to a 3-fund portfolio:


Fig. 1 - the effect of QSPIX in a portfolio. Volatility is reduced due to the low correlation of alts to stocks and bonds, but return is reduced due to the very poor performance of alts over the last 2 years.

Neat trick by reducing equity exposure and claiming QSPIX has reduced volatility, but your claim simply is false as evidenced by the numbers. A better result was achieved by using bonds alone.


VT 60% /BND 40%
5.49% CAGR
8.23% StDev
0.58 Sharpe Ratio


VT 60% / BND 30% / QSPIX 10%
4.90% CAGR. <--- lower returns
8.27% StDev <--- higher StDev
0.51 Sharpe Ratio

-------------------------

VT 55% /BND 45%
5.40% CAGR
7.59% StDev
0.62 Sharpe Ratio

VT 55% / BND 35% / QSPIX 10.00%
4.82% CAGR. <--- lower returns
7.62% StDev < --- higher standard deviation
0.54 Sharpe Ratio

Note:
Jan 2014 - Jun 2020 (life of QSPIX)

[wickywack]

Larry also stated both in this forum and his website that adding alts allows the investor to extend bond maturities (go for longer duration), which by itself without any of the other aforementioned changes would more than make up for the awful performance of QSPIX:

Interesting - I thought Swedroe was generally in the short / bond-are-for-safety camp. BAM seems to recommend intermediate here, but that's back in '13.

[nedsaid]

I want to make it clear that I am not casting aspersions on anyone's character with my observations regarding the Liquid Alts. Don't want to be associated with calling people con men or calling into question their intelligence. What I do want to clearly say is that Liquid Alts have not made their case as a Bond alternative or even as a good portfolio diversifier. Their performance has been disappointing to say the least. Trying to outsmart all the other traders is a very big intellectual challenge, it is a quest for the impossible.

It seems to me that the less transparent that the Liquid Alts are, probably the better for the investor. This is an area where you want secrecy, whatever you reveal about your processes only invites the hedge funds to take advantage. If you reveal anything about a successful strategy, others will copy. The more open that Asness and others in this space are, probably the less returns their funds will generate. We as investors want transparency, we know too well that trust can be easily violated as in Bernie Madoff. This sets up a bit of a dilemma, we want the returns but are loathe to just trust people with our money in opaque investments. Secrecy might be a key for successful trading but also invites dishonesty. Also doesn't help that Asness and AQR operate in a more regulated environment than the hedge funds. AQR has taken up a terrific challenge that I am not sure anyone really can meet. Perhaps success in this Liquid Alt space is just luck. It suggests that the markets are pretty darned efficient.

[james22]

Perhaps success in this Liquid Alt space is just luck. It suggests that the markets are pretty darned efficient.

Why not just recognize the market can be irrational?

And that those rationally advocating alternatives are simply bumping up against that?

[typical.investor]

Perhaps success in this Liquid Alt space is just luck. It suggests that the markets are pretty darned efficient.

Why not just recognize the market can be irrational?

And that those rationally advocating alternatives are simply bumping up against that?

In what way is market irrationality to blame for QSPIX's performance?

In a 70/30 stock/bond portfolio, replacing half of the bonds with BTAL (AGFiQ US Market Neutral Anti-Beta) increased return (8.30% -> 8.39%) and reduces volatility (9.88% ->8.67%) . Doing the same with QSPIX reduces return (8.30% ->7.42%) and increases volatility (9.88% ->9.99%

Given that BTAL follows the Dow Jones U.S. Market Neutral Anti-Beta Index which is:

Dow Jones U.S. Low Beta Index 100%
Dow Jones U.S. High Beta Index -100%
Dow Jones U.S. High Momentum 100%
Dow Jones U.S. Low Momentum -100%
Dow Jones U.S. Thematic Long Quality Index 100%
Dow Jones U.S. Thematic Short Quality Index -100%
Dow Jones U.S. Thematic Long Size Index 100%
Dow Jones U.S. Thematic Short Size Index -100%
Dow Jones U.S. Relative Value Index 100%
Dow Jones U.S. Short Relative Value Index -100%

What is it about the irrationality of the market that doesn't impact the usefulness of BTAL? It’s targeting low volatility, momentum, quality, size and value.

[Steve Reading]

Given that BTAL follows the Dow Jones U.S. Market Neutral Anti-Beta Index which is:

Dow Jones U.S. Low Beta Index 100%
Dow Jones U.S. High Beta Index -100%
Dow Jones U.S. High Momentum 100%
Dow Jones U.S. Low Momentum -100%
Dow Jones U.S. Thematic Long Quality Index 100%
Dow Jones U.S. Thematic Short Quality Index -100%
Dow Jones U.S. Thematic Long Size Index 100%
Dow Jones U.S. Thematic Short Size Index -100%
Dow Jones U.S. Relative Value Index 100%
Dow Jones U.S. Short Relative Value Index -100%

What is it about the irrationality of the market that doesn't impact the usefulness of BTAL? It’s targeting low volatility, momentum, quality, size and value.

Can you post a source that shows that’s what the DJ US Market Neutral Anti-Beta Index follows? Couldn’t find one myself.

BTAL only appears to be long low-beta and short high-beta. To me, it doesn’t appear to target any of those other factors you say it does.

Thanks

[typical.investor]

Given that BTAL follows the Dow Jones U.S. Market Neutral Anti-Beta Index which is:

Dow Jones U.S. Low Beta Index 100%
Dow Jones U.S. High Beta Index -100%
Dow Jones U.S. High Momentum 100%
Dow Jones U.S. Low Momentum -100%
Dow Jones U.S. Thematic Long Quality Index 100%
Dow Jones U.S. Thematic Short Quality Index -100%
Dow Jones U.S. Thematic Long Size Index 100%
Dow Jones U.S. Thematic Short Size Index -100%
Dow Jones U.S. Relative Value Index 100%
Dow Jones U.S. Short Relative Value Index -100%

What is it about the irrationality of the market that doesn't impact the usefulness of BTAL? It’s targeting low volatility, momentum, quality, size and value.

Can you post a source that shows that’s what the DJ US Market Neutral Anti-Beta Index follows? Couldn’t find one myself.

BTAL only appears to be long low-beta and short high-beta. To me, it doesn’t appear to target any of those other factors you say it does.

Thanks

Yeah, I think you are right. Good catch.

I followed the methodology for the fund on their page but see now it includes the methodology for the whole family of related indices.

Apologies.

[Random Walker]

I want to make it clear that I am not casting aspersions on anyone's character with my observations regarding the Liquid Alts. Don't want to be associated with calling people con men or calling into question their intelligence. What I do want to clearly say is that Liquid Alts have not made their case as a Bond alternative or even as a good portfolio diversifier. Their performance has been disappointing to say the least. Trying to outsmart all the other traders is a very big intellectual challenge, it is a quest for the impossible.

It seems to me that the less transparent that the Liquid Alts are, probably the better for the investor. This is an area where you want secrecy, whatever you reveal about your processes only invites the hedge funds to take advantage. If you reveal anything about a successful strategy, others will copy. The more open that Asness and others in this space are, probably the less returns their funds will generate. We as investors want transparency, we know too well that trust can be easily violated as in Bernie Madoff. This sets up a bit of a dilemma, we want the returns but are loathe to just trust people with our money in opaque investments. Secrecy might be a key for successful trading but also invites dishonesty. Also doesn't help that Asness and AQR operate in a more regulated environment than the hedge funds. AQR has taken up a terrific challenge that I am not sure anyone really can meet. Perhaps success in this Liquid Alt space is just luck. It suggests that the markets are pretty darned efficient.

Hi Nedsaid,
I’m gonna disagree with you here. I’m sure we agree that markets are highly, but not perfectly, efficient. The few anomalies that are recognized have strong reasons for not being arbitraged away. I know Asness himself considers QSPIX active, but in many ways it is systematically, passively, investing in these known potential sources of return. Academic publication of factors and styles does appear to cut the forward looking expected returns from the premia, but publication should not eradicate the premia entirely. I think the benefits of systematic approach and lower fees than hedge funds should outweigh any potential hedge fund benefits derived from opacity. Clearly though, I’m no expert and can’t deny the painful performance of QSPIX.

Dave

[marcopolo]

I want to make it clear that I am not casting aspersions on anyone's character with my observations regarding the Liquid Alts. Don't want to be associated with calling people con men or calling into question their intelligence. What I do want to clearly say is that Liquid Alts have not made their case as a Bond alternative or even as a good portfolio diversifier. Their performance has been disappointing to say the least. Trying to outsmart all the other traders is a very big intellectual challenge, it is a quest for the impossible.

It seems to me that the less transparent that the Liquid Alts are, probably the better for the investor. This is an area where you want secrecy, whatever you reveal about your processes only invites the hedge funds to take advantage. If you reveal anything about a successful strategy, others will copy. The more open that Asness and others in this space are, probably the less returns their funds will generate. We as investors want transparency, we know too well that trust can be easily violated as in Bernie Madoff. This sets up a bit of a dilemma, we want the returns but are loathe to just trust people with our money in opaque investments. Secrecy might be a key for successful trading but also invites dishonesty. Also doesn't help that Asness and AQR operate in a more regulated environment than the hedge funds. AQR has taken up a terrific challenge that I am not sure anyone really can meet. Perhaps success in this Liquid Alt space is just luck. It suggests that the markets are pretty darned efficient.

Hi Nedsaid,
I’m gonna disagree with you here. I’m sure we agree that markets are highly, but not perfectly, efficient. The few anomalies that are recognized have strong reasons for not being arbitraged away. I know Asness himself considers QSPIX active, but in many ways it is systematically, passively, investing in these known potential sources of return. Academic publication of factors and styles does appear to cut the forward looking expected returns from the premia, but publication should not eradicate the premia entirely. I think the benefits of systematic approach and lower fees than hedge funds should outweigh any potential hedge fund benefits derived from opacity. Clearly though, I’m no expert and can’t deny the painful performance of QSPIX.

Dave

So, you trust AQR to balance the complex factor weights in a beneficial way, but don't trust that they can tell if their approach active or passive?

[nedsaid]

Perhaps success in this Liquid Alt space is just luck. It suggests that the markets are pretty darned efficient.

Why not just recognize the market can be irrational?

And that those rationally advocating alternatives are simply bumping up against that?

Yes, the market can be irrational and we saw this back in March. Really odd things were happening in the markets that defied easy explanation. This is why I have hedged my comments saying "darned" efficient or "mostly" efficient. Markets are pretty efficient most of the time and rational most of the time. But we see both euphoria and panic in the markets. It is the human element, the emotions of fear and great that can't be reduced to math. Investing is not an engineering problem with a mathematical solution. Certainly a solid grasp of math helps a lot but math isn't the thing itself. There is no "theory of everything" when it comes to investing. The best we can do is perhaps a "theory of almost everything" but there are these events of wildness, excessive volatility, and even outright panic that occur in the markets.

Cliff Asness is a really smart guy, he was Fama's star pupil. But even he didn't have all this figured out or QSPIX would be performing better. It is like QSPIX is an answer to a problem that maybe can't be solved.

[nedsaid]

I want to make it clear that I am not casting aspersions on anyone's character with my observations regarding the Liquid Alts. Don't want to be associated with calling people con men or calling into question their intelligence. What I do want to clearly say is that Liquid Alts have not made their case as a Bond alternative or even as a good portfolio diversifier. Their performance has been disappointing to say the least. Trying to outsmart all the other traders is a very big intellectual challenge, it is a quest for the impossible.

It seems to me that the less transparent that the Liquid Alts are, probably the better for the investor. This is an area where you want secrecy, whatever you reveal about your processes only invites the hedge funds to take advantage. If you reveal anything about a successful strategy, others will copy. The more open that Asness and others in this space are, probably the less returns their funds will generate. We as investors want transparency, we know too well that trust can be easily violated as in Bernie Madoff. This sets up a bit of a dilemma, we want the returns but are loathe to just trust people with our money in opaque investments. Secrecy might be a key for successful trading but also invites dishonesty. Also doesn't help that Asness and AQR operate in a more regulated environment than the hedge funds. AQR has taken up a terrific challenge that I am not sure anyone really can meet. Perhaps success in this Liquid Alt space is just luck. It suggests that the markets are pretty darned efficient.

Hi Nedsaid,
I’m gonna disagree with you here. I’m sure we agree that markets are highly, but not perfectly, efficient. The few anomalies that are recognized have strong reasons for not being arbitraged away. I know Asness himself considers QSPIX active, but in many ways it is systematically, passively, investing in these known potential sources of return. Academic publication of factors and styles does appear to cut the forward looking expected returns from the premia, but publication should not eradicate the premia entirely. I think the benefits of systematic approach and lower fees than hedge funds should outweigh any potential hedge fund benefits derived from opacity. Clearly though, I’m no expert and can’t deny the painful performance of QSPIX.

Dave

Hey Dave, I 100% agree with you that markets are highly, but not perfectly efficient. I am with you and Larry Swedroe about investing across factors. I was and am still open minded about the Liquid Alts but I can't deny what I see with my own eyes.

I pretty strongly hinted at this above, the central problem with QSPIX is that it has a systematic approach, and that it has a rules based, more passive approach. What I am trying to say is that the hedge funds know enough about AQR's approach that the professional traders at the hedge funds can take advantage. Any openness about the fund's investing approach will result in lower investment results for AQR. The fund might be opaque but from observing the day to day price movements in QSPIX and looking at publicly available information, professional traders might have formulated a pretty good guess as to what AQR is doing. QSPIX may not be opaque enough. For the fund to really deliver, it might have to be a 100% black box and not just opaque. In addition, Asness does post a lot and provides a lot of information about what went wrong and this too provides information that is used against him in the markets.

What Asness should be doing, in sort of an evil way, is misdirecting. That is lying about what he is really doing and try to jawbone the markets to act in a way that will benefit his fund. There is a video out there of James Cramer admitting that he spread rumors in the markets to talk certain stocks down so that his hedge fund could benefit. I recall Bogleheads marveling that this video didn't result in a lifetime ban for Mr. Cramer. Certainly, I don't advocate lying and I don't advocate other forms of unethical behavior, but trying to be open and honest might be putting AQR at a disadvantage.

There is an old saying from World War II that a slip of the lip can sink a ship. Asness may have been too open about his methodology, his ship didn't sink but QSPIX is listing to port. Hopefully the pumps below the waterline are working.

The thing is, the research behind the fund was impeccable. There was and is a more passive and systematic approach. This fund was well thought through. But somehow this very nice idea hasn't worked so well in practice. Heck, I wanted this to work. Like everyone else, I am looking for a good diversifier and something that will deliver what bonds delivered when interest rates were more like 6%-8%. Now bonds yield 1% to 2%. What Mr. Asness has learned is that markets do what markets do and that asset classes do not have to act according to our expectations. This is a perfect example that investing is not an engineering or physics problem that can be solved with math. There is a wild card in the deck that messes with the best of plans.

[nedsaid]

I don't know, perhaps we as investors ought to be philosophers and psychologists rather than trying to be mathematicians and programmers.

[zaboomafoozarg]

I don't know, perhaps we as investors ought to be philosophers and psychologists rather than trying to be mathematicians and programmers.

Yeah, honestly almost every "smart" thing I've done with my investments has made me poorer so far.

When I started my first job with a 401k 15 years ago, I chose 100% US stocks. I would have a ridiculous amount of right money now if I'd have stuck with that allocation and never given it a second thought.

[nedsaid]

What I would say is that for those of you who hold QSPIX or a similar AQR fund in your portfolio as part of an investing across factors strategy, I would read up on everything publicly available about the fund and I would read what Cliff Asness has been posting. If you are a Buckingham client, I would ask the Advisor some good questions. From what Larry Swedroe has posted, this fund or a similar fund is recommended along with 3 semi-liquid interval funds and that together these four Alternative investments would comprise of maybe 20% of the portfolio. What I would do is some analysis of returns and pay particular attention to the recent bear market, looking at how the portfolio as a whole has performed. Is the portfolio as a whole performing as it was designed to perform?

While I have been pretty disappointed with the Liquid Alts in general and disappointed with the semi-liquid interval funds, look at these as part of the overall portfolio. In QSPIX case, my sense is that the underperformance of Value as a factor is a culprit. If Value sees a pop, a spurt where Value outperforms Growth by a meaningful amount, my suspicion is that QSPIX might pop as well.

This is where you put on your philosopher's hat and think things through. A good time to look at your Investment Policy Statement. A good time to look at your core beliefs regarding markets and investing. What I am trying to say is to not to panic out of these or any other investments. The decision whether or not to sell a disappointing investment is a very tough one. Very difficult to tell if QSPIX is experiencing temporary problems because of market and asset class behavior or if the product itself has a fundamental flaw that cannot be fixed. It is a tough decision that requires a lot of thought.

I have joked a lot about trying to get true factor believers to capitulate so that my factor investments can profit. That isn't my intent here. What I am trying to say is that issues like this are the whole reason that you write up an Investment Policy Statement in the first place. I big reason that I tell people to write down their core beliefs.

I don't want to be the guy that talks people out of QSPIX right before the thing pops and starts to do really well. You need to know why you bought this in the first place. It might be that you have to rethink some things and make changes to your Investment Policy Statement. Or it might be that you decide to stick with your earlier decisions.

[nedsaid]

I don't know, perhaps we as investors ought to be philosophers and psychologists rather than trying to be mathematicians and programmers.

Yeah, honestly almost every "smart" thing I've done with my investments has made me poorer so far.

When I started my first job with a 401k 15 years ago, I chose 100% US stocks. I would have a ridiculous amount of right money now if I'd have stuck with that allocation and never given it a second thought.

Yep, Forrest Gump bought Apple stock because he thought it was a fruit company. Perhaps we all should be idiot savants. Any who it works that way in the movies, maybe not so much in real life.

[afan]

I am not sure one needs to worry about Asness being too open about what his funds do.
First, they have a lot of room to operate within the approach they claim. They do not specify the exact trades they will make or when.

More important, QSPIX is not nearly big enough to be the market. Any investments it makes are made against the market overall, not just a small handful of people who pay attention to what Asness does. Huge amounts of money are bet every day, amplified by leverage and derivatives. Perhaps an actively managed massive sovereign wealth fund might be big enough to move markets. AQR, no where close.

Finally, one has to assume other institutional investors care what AQR does. There are lots of funds run by smart people. What is so special about AQR?

Maybe the reason liquid alts don't work is not too much transparency, which permits others to exploit their openness. Maybe liquid alts don't work because they don't work.

[nedsaid]

Maybe liquid alts don't work because they don't work.

What we are trying to do is figure out why they don't work. Probably a combination of things.

[SpaceCowboy]

More important, QSPIX is not nearly big enough to be the market. Any investments it makes are made against the market overall, not just a small handful of people who pay attention to what Asness does. Huge amounts of money are bet every day, amplified by leverage and derivatives. Perhaps an actively managed massive sovereign wealth fund might be big enough to move markets. AQR, no where close.

I agree with this. AQR just isn’t a big enough piece of the market for people to specifically trade ahead of or otherwise counter.

Maybe the reason liquid alts don't work is not too much transparency, which permits others to exploittheir openness. Maybe liquid alts don't work because they don't work.

We can only say that liquid alts haven’t worked recently. How they will perform in the next 5-10 years, nobody knows.
Just like nobody knows if BTAL, which is a pretty small $125 AUM ETF, will be a superior portfolio diversifier than QSPIX over the next 5-10 years. Past performance is not a good predictor of future performance.
What I have learned from the GFR and the March dislocations is that long Treasuries are probably the best cushion for crashes. The issue for me has been that long Treasury rates haven’t been high enough in my mind to justify the term risk. I’ll probably add a slice of long Treasuries to my fixed income portfolio to complement my CDs and TIPS when the rates return to something like at least what used to be the new normal 2-3%.

[afan]

Why don't they work?

Boring answers

Fees are far too high
Trading costs are far too high
Expenses are far too high

These are all true but there are bigger problems

They are a bet that there exists a stable loophole in market efficiency. This loophole is big enough to accommodate thousands of sophisticated institutional traders who have the scale and skill to exploit them. The loophole is stable once everyone knows about it.

They are a bet that one can find an active manager who is so much better than other active managers that they can exploit this loophole. Presumably by taking advantage of other active managers who are trying to exploit these or other loopholes.

They are a bet that there is an illiquidity premium to be had in these liquid investments. Again, a loophole.

Many are not invested in particularly illiquid assets, so no reason to expect a premium. To the extent they have made an illiquid investment liquid, the premium, if it existed, should go away.

My favorite, of course is

They were a marketing gimmick.

There is little money to be made by selling cap weighted index funds, operated at cost.
There is a lot of money to be made by convincing people there is a special velvet rope behind which lurks a wonderland of market-beating investments.

It worked long enough to bring in a lot of investor money. Those who sold these funds made money. Those who marketed the funds to their clients made money. Banks and brokerages that did business with the funds made money.
It was good while it lasted.

Will they still exist 20 years from now? Or will they be just another successful gimmick that brought in money for a while, then faded away when reality caught up with them?

To the question "why don't they work", I would ask "why should they?"

[Random Walker]

So, you trust AQR to balance the complex factor weights in a beneficial way, but don't trust that they can tell if their approach active or passive?

No. I trust AQR to do what they do in a systematic/formulaic way with no significant individual security selection or market timing. I believe that people can to some extent define active and passive differently. With all the trading involved in maintaining the fund, I can certainly appreciate why he describes it as active.

Dave

[Random Walker]

To the question "why don't they work", I would ask "why should they?"

1. Because risks deserve premia
2. Human behavior is tremendously persistent over time
3. Limits to arbitrage

I can’t argue with the fact that the last several years have been rough. But we can only invest looking forward. Markets are ruthlessly efficient, premia take haircuts after dissemination of knowledge. But human behavior is very sticky and there are limits on the short side to the ability to take advantage. Separate from having real money at stake, it will be so interesting to see how this all pans out over time. Charles Ellis wrote that investing keeps the individual young; I can see why!

Dave

[afan]

Most risks do not have premia.

Human behavior changes constantly in response to new data and opportunities.

No evidence that these funds are exploiting limits to arbitrage.

[typical.investor]

I can’t argue with the fact that the last several years have been rough. But we can only invest looking forward. Markets are ruthlessly efficient, premia take haircuts after dissemination of knowledge. But human behavior is very sticky and there are limits on the short side to the ability to take advantage. Separate from having real money at stake, it will be so interesting to see how this all pans out over time. Charles Ellis wrote that investing keeps the individual young; I can see why!

Dave

I think it's great the way you stick with your plan. Kudos!

In the end, I think that West Grey may have been right when he suggested factors themselves may load on just a few common things - such as growth and inflation.

Who knows if inflation will be ever sighted again, but if it does I'd almost expect it'd be more globally that previously otherwise companies would just shift costs to the extent they are able to other locations.

Value investing seems a little bit of an inflation hedge to me. Not just me though I think...

Why one strategist is wondering whether the trade of a lifetime is on its last legs

For many investment professionals, there has never been a world where interest rates have done anything but gone down.

“I started in 1994. Over my whole career, interest rates have gone down. It’s been a one-way trade to buy growth stocks,” says Daniel White, senior research and strategy manager at Canada Life Investments in London.

“When you have no inflation, or lower and lower inflation, you buy asset-light businesses,” he says, referring to companies that aim to keep variable costs low, rely on outsourcing and don’t have lots of fixed costs.

“But if you start getting inflation in the system, the whole landscape begins to change,” he says. Suddenly companies with high fixed costs, from hotels to utilities, are able to pass on those costs.

-Marketwatch