Part 3 of lessons the markets taught in 2016

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larryswedroe
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Part 3 of lessons the markets taught in 2016

Post by larryswedroe » Fri Jan 27, 2017 9:09 am

The final part of my series. While my crystal ball is always cloudy I'm confident that the market will provide some remedial courses this year
http://www.etf.com/sections/index-investor-corner/swedroe-lessons-2016-part-three
Best wishes
Larry

4th and Inches
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Re: Part 3 of lessons the markets taught in 2016

Post by 4th and Inches » Fri Jan 27, 2017 9:42 am

Great information in that series. Thank you for sharing. I especially like the part that addresses how much portfolio return performance is attributed to such a small number days.

Random Walker
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Re: Part 3 of lessons the markets taught in 2016

Post by Random Walker » Fri Jan 27, 2017 10:44 am

"For the 10-year period, an all-equity portfolio allocated 50% internationally and 50% domestically, again equally weighted in the asset classes within those broad categories, would have returned 4.1% per year. A 60% equity and 40% bond portfolio with the same weights for the equity allocation would have returned 3.0% per year using one-year Treasurys, 4.1% per year using five-year Treasurys and 5.1% per year using long-term Treasuries"

Same exact return for an all equity portfolio as a 60/40 portfolio with intermediate term treasuries! Modest doses of bonds decrease volatility way more than returns! I remember Bob Brinker once saying long ago that a 50/50 portfolio would make something like 80% of the gains of an all stock portfolio.

Dave

Random Walker
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Re: Part 3 of lessons the markets taught in 2016

Post by Random Walker » Fri Jan 27, 2017 10:51 am

I realize that funds like AQR Style Premia and AQR Managed Futures are pretty much formulaic and passive. But is it fair to say that to some extent they share some hedge fund like qualities? Their expenses are certainly very high for passive funds. Would it be more appropriate to see the effect of a hedge fund as a component of a portfolio rather than a direct comparison of hedge fund to a portfolio? Certainly when we evaluate funds like QSPIX and QMHIX we don't look at them in isolation compared to portfolios. Rather we look at how their expected returns, volatilities, correlations mix in the portfolio. Thanks,

Dave

larryswedroe
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Re: Part 3 of lessons the markets taught in 2016

Post by larryswedroe » Fri Jan 27, 2017 11:00 am

Dave
First, their expenses are high partly because they are more complex and more expensive to run. Another reason is that there isn't much competition (unfortunately) except from hedge funds that charge much more. Hopefully competitors arrive and push prices lower, but this isn't simple space to run. Need huge investment in trading technology around the globe.

As to hedge funds and comparisons. First there is no really generic hedge fund. Some are highly active in that they are making decisions about what to buy/sell based on personal opinions and they also have great freedom to move in and out of markets, go to cash, move across asset classes, and so on. Some on the other hand are truly run in the same way AQR runs their public funds. They run hedge funds in the same way, just charge more. They keep strategies in hedge fund structures where there is very limited capacity, so they might as well get paid more for it. The public funds have much larger capacities. So it's not a question of "hedge" fund or not, but is it "rules based" and not individual decision making. AQR funds define their universe, the buy and hold rules and then follow them, though not precisely because they care about implementation costs and are willing to accept tracking error, which should be random, in return for lower implementation costs.

Hope that helps
larry

larryswedroe
Posts: 15598
Joined: Thu Feb 22, 2007 8:28 am
Location: St Louis MO

Re: Part 3 of lessons the markets taught in 2016

Post by larryswedroe » Fri Jan 27, 2017 11:00 am

Dave
First, their expenses are high partly because they are more complex and more expensive to run. Another reason is that there isn't much competition (unfortunately) except from hedge funds that charge much more. Hopefully competitors arrive and push prices lower, but this isn't simple space to run. Need huge investment in trading technology around the globe.

As to hedge funds and comparisons. First there is no really generic hedge fund. Some are highly active in that they are making decisions about what to buy/sell based on personal opinions and they also have great freedom to move in and out of markets, go to cash, move across asset classes, and so on. Some on the other hand are truly run in the same way AQR runs their public funds. They run hedge funds in the same way, just charge more. They keep strategies in hedge fund structures where there is very limited capacity, so they might as well get paid more for it. The public funds have much larger capacities. So it's not a question of "hedge" fund or not, but is it "rules based" and not individual decision making. AQR funds define their universe, the buy and hold rules and then follow them, though not precisely because they care about implementation costs and are willing to accept tracking error, which should be random, in return for lower implementation costs.

Hope that helps
larry

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