What's Wrong With AQR? (Managed Futures)

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matjen
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What's Wrong With AQR? (Managed Futures)

Post by matjen » Tue Apr 18, 2017 2:28 pm

An interesting article on AQR's Managed Futures Fund (AQMIX). I would guess especially interesting for those of you that have invested in it given the recent rough ride.
In the end, we don’t believe there’s anything wrong with AQR’s managed futures offering. It’s doing what it was designed to do, keeping its powder dry and suffering consistent losses in exchange for future outlier-type gains. It’s about in line with the rest of the space over the past three years, and the past year of underperformance may just be a result of it being a little more volatile than the average fund in the space. So, losing more on the downside, but able to make more on the upside (we’ll have to wait and see if that’s the case).
https://www.rcmalternatives.com/2017/04 ... -with-aqr/
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Re: What's Wrong With AQR? (Managed Futures)

Post by Random Walker » Tue Apr 18, 2017 8:18 pm

You picked a great day for this post: down 1.52% today alone! I have a 3% allocation to QMHRX. I'm really interested to see where Managed Futures goes in the future. TS Momentum has a strong track record, big Sharpe Ratio, but is entirely a behavioral story.

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Re: What's Wrong With AQR? (Managed Futures)

Post by cheapskate » Wed Apr 19, 2017 1:17 am

I have a small allocation in AQMIX and QMHIX. They are wonderfully mis-correlated with the markets. They go down regardless of what the equity markets or fixed income markets do :), I have large losses in them over the past 2+ years (nearly 3 maybe).

On the plus side, they have been great for TLH. I have been consistently locking in losses moving between AQMIX and QMHIX. But I am concerned I can't do that any more after they go to near 0 :)

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Re: What's Wrong With AQR? (Managed Futures)

Post by whodidntante » Wed Apr 19, 2017 1:41 am

I want to believe.

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Re: What's Wrong With AQR? (Managed Futures)

Post by tarheel » Wed Apr 19, 2017 5:33 am

From the article: "In the end, we don’t believe there’s anything wrong with AQR’s managed futures offering. It’s doing what it was designed to do, keeping its powder dry and suffering consistent losses in exchange for future outlier-type gains."

People investing in these strategies need to know what they are doing, why they are invested, and need to be in them for the long term. This stuff is not for the average Boglehead. I have a 7.5% allocation to QMHIX and have lost ~15% since my initial allocation. I'm not concerned, and think the fund is doing what it's supposed to do. When a new trend arises, it will pick up on it.

On one of Covel's trend following podcasts someone gave a great analogy for these funds. It's like sitting in a chair on a sidewalk in NYC. Most of the time it's a miserable experience, with people slamming into you and giving you problems.....but when the parade comes by, you simply couldn't have a better spot.

Honestly, if anything I've been thinking about increasing my allocation.......

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Re: What's Wrong With AQR? (Managed Futures)

Post by nisiprius » Wed Apr 19, 2017 7:52 am

I don't know if there's anything wrong with AQR's Managed Futures Fund (AQMIX), which is a mutual fund--I think--see the comment below. Mutual funds are regulated investment companies under the Investment Company Act of 1940 which afford significant protections to investors, which I don't think investors always appreciate.

There seems to be plenty wrong with "Managed Futures funds" themselves (which are a kind of hedge fund, thus are not mutual funds, not subject to the 1940 act). As in, "can you believe this?"
How Investors Lose 89% of Gains From Futures Funds. The scariest thing about this article, as in "how was this possible," is the comment that
The prospectus pitching the Spectrum fund, issued in March 2003, said the firm would accept investments as low as $2,000 for individual retirement accounts.
I generally ignore stuff that is presented as an innovative new ETF or mutual fund that for the first time finally makes it possible for Joe Sixpack to invest in sophisticated strategies that were once the exclusive province of hedge funds etc. I understand that the idea behind a lot of AQR's offerings is that things that may be evil when someone is charging two and twenty may be much more interesting when someone is charging "only" 1.22%.

And I do wonder about something. AQMIX is a mutual fund, regulated by the Act of 1940, but--do I understand this correctly?--it's allowed to make investments in things that aren't. I don't need to understand this because I'm not investing in the fund, but if I were I would want to be sure that I did understand exactly what this means. It's my boldfacing, and I'm boldfacing both the "maybe not OK" and the "but maybe OK because" bits:
The Fund intends to make investments through the Subsidiary and may invest up to 25% of its total assets in the Subsidiary. Generally, the Subsidiary will invest primarily in commodity futures and swaps, but it may also invest in financial futures, option and swap contracts, fixed income securities, pooled investment vehicles, including those that are not registered pursuant to the 1940 Act, and other investments intended to serve as margin or collateral for the Subsidiary’s derivative positions. The Fund will invest in the Subsidiary in order to gain exposure to the commodities markets within the limitations of the federal tax laws, rules and regulations that apply to registered investment companies. Unlike the Fund, the Subsidiary may invest without limitation in commodity-linked derivative instruments, however, the Subsidiary will comply with the same 1940 Act asset coverage requirements with respect to its investments in commodity-linked derivatives that are applicable to the Fund’s transactions in derivatives. In addition, to the extent applicable to the investment activities of the Subsidiary, the Subsidiary will be subject to the same fundamental investment restrictions and will follow the same compliance policies and procedures as the Fund. Unlike the Fund, the Subsidiary will not seek to qualify as a regulated investment company under Subchapter M of the Code.
I have to say, too, that it sure looks to me as if mutual funds are increasingly finding tricky ways around the invent of the regulations that are supposed to put very strict limits on leverage in mutual funds.
Last edited by nisiprius on Wed Apr 19, 2017 4:32 pm, edited 1 time in total.
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Re: What's Wrong With AQR? (Managed Futures)

Post by nedsaid » Wed Apr 19, 2017 8:25 am

It is like the old saying about being to clever by half. Sometimes we are just too smart for our own good. We want to overthink investing and we try to outsmart the markets. This also reminds me of the Cold War Spy vs. Spy and measure vs. countermeasure. Markets are volatile and sometimes more volatile than we like, we want the greater returns but not the greater volatility. Hence the search for things that can act as diversifiers, zig while other investments zag, smoothing the ride. What happens in real life and real markets is that our intelligent strategies sometimes work and sometimes don't.

I don't think anything is wrong with AQR. I don't think anything is wrong with Cliff Asness. It is just that markets have that element of unpredictability that even the brightest among us cannot wrap our brains around. Asset classes don't always act in the ways that we think they should. I have been reading good things about AQR but we have to be realistic that even these diversifiers will disappoint from time to time. It is just the nature of markets. Another issue is the billions, if not trillions of "hot" money flowing around the globe that can suddenly change direction at the push of a button or the click of a mouse, hard to see how even the brightest minds of the investment world can account for that. We can never be sure what the gigantic hedge funds out there are doing.

Warren Buffett really clarified my thinking on this when he said that when you buy a stock or a bond, you are buying a set of cash flows. We buy the cash flows generated by the operation of business to grow our wealth over time. We buy REITs to get the cash flows from the ownership of Real Estate. We buy bonds, particularly quality bonds, for more predictable cash flows and to help protect the wealth created from business and Real Estate. In other words, I want to be a long term owner of business and real estate and of the debt that helps finance wealth creation. Buy good stuff and keep it.

I like to own things because of their intrinsic value and not so much for they might hedge against unpredictable human nature and behavior. I want to own something because it is valuable and will increase in value over time and not because of what I think other market participants will do over the short term.
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Re: What's Wrong With AQR? (Managed Futures)

Post by matjen » Wed Apr 19, 2017 9:56 am

tarheel wrote:From the article: "In the end, we don’t believe there’s anything wrong with AQR’s managed futures offering. It’s doing what it was designed to do, keeping its powder dry and suffering consistent losses in exchange for future outlier-type gains."

People investing in these strategies need to know what they are doing, why they are invested, and need to be in them for the long term. This stuff is not for the average Boglehead. I have a 7.5% allocation to QMHIX and have lost ~15% since my initial allocation. I'm not concerned, and think the fund is doing what it's supposed to do. When a new trend arises, it will pick up on it.

On one of Covel's trend following podcasts someone gave a great analogy for these funds. It's like sitting in a chair on a sidewalk in NYC. Most of the time it's a miserable experience, with people slamming into you and giving you problems.....but when the parade comes by, you simply couldn't have a better spot.

Honestly, if anything I've been thinking about increasing my allocation.......
I don't own any managed futures but I completely agree with you tarheel. If the fund is performing as one would expect it to perform then there is not much else to say. If we were in a recession and unemployment went up to 10% and VTI was down 25%, experienced Bogleheads wouldn't think there was anything wrong with VTI. Having said that, I would imagine that it is a little disconcerting that the AQR strategy is at the bottom of the pile of the Managed Futures sector.
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Re: What's Wrong With AQR? (Managed Futures)

Post by garlandwhizzer » Wed Apr 19, 2017 12:17 pm

It's all a matter of personal preference, but as for me I have absolutely no interest in purchasing a complex alternate investment product with an annual fee of 1.2% whose goal is largely diversification, to zig when your equity portfolio zags. I prefer things that do not involve complex and expensive strategies which are based on data mining theory but as time passes are sucking considerable dollars in the way of fees out of investors' pockets. As for diversification benefits to an equity portfolio, it's important to remember for those of us who like to keep things simple that there are these things called bonds which provide consistent and inexpensive diversification. The track record for alternate investment strategies whose goal is to counterbalance equity volatility demonstrates that in fact it has achieved that goal. In the roaring bull market we've had in recent years they have largely remained on the sidelines. Diversification has been real, returns have been nonexistent to low, probably less than quality bonds which provide fool proof diversification. When will another investment opportunity like the one since 2009 present itself? No one knows. Many suspect we're in for lean years going forward. If you've been standing on the sidelines with a large portfolio allocation to alt investment schemes, you may have watched your best chance for outsized returns slide by without taking advantage. Another train like that one may not arrive in the station for a long time.

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Re: What's Wrong With AQR? (Managed Futures)

Post by tarheel » Wed Apr 19, 2017 1:25 pm

matjen wrote:
tarheel wrote:From the article: "In the end, we don’t believe there’s anything wrong with AQR’s managed futures offering. It’s doing what it was designed to do, keeping its powder dry and suffering consistent losses in exchange for future outlier-type gains."

People investing in these strategies need to know what they are doing, why they are invested, and need to be in them for the long term. This stuff is not for the average Boglehead. I have a 7.5% allocation to QMHIX and have lost ~15% since my initial allocation. I'm not concerned, and think the fund is doing what it's supposed to do. When a new trend arises, it will pick up on it.

On one of Covel's trend following podcasts someone gave a great analogy for these funds. It's like sitting in a chair on a sidewalk in NYC. Most of the time it's a miserable experience, with people slamming into you and giving you problems.....but when the parade comes by, you simply couldn't have a better spot.

Honestly, if anything I've been thinking about increasing my allocation.......
I don't own any managed futures but I completely agree with you tarheel. If the fund is performing as one would expect it to perform then there is not much else to say. If we were in a recession and unemployment went up to 10% and VTI was down 25%, experienced Bogleheads wouldn't think there was anything wrong with VTI. Having said that, I would imagine that it is a little disconcerting that the AQR strategy is at the bottom of the pile of the Managed Futures sector.
There was a Meb Faber podcast - I tihnk it was a 2016 in review one - where they talked about how Managed Futures/Trend Following funds are often constructed very differently. So while some Managed Futures funds had returns last year in the positive single digit range, others (like AQR) were negative. It's comparing apples to oranges a bit.

I do not claim to know what strategy is best, so I go with AQR and QMHIX, which Larry Swedroe has supported in the past. Good enough for me. I don't take a big bet and use it for diversification purposes.

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Re: What's Wrong With AQR? (Managed Futures)

Post by Bitzer » Wed Apr 19, 2017 2:10 pm

The domestic stock market has had an impressive upward trend over the past several years. Perhaps I'm missing something, but I'd be curious as to why AQR and other managed futures funds apparently haven't managed to profit from that trend.

I'd also be interested to know what Mr Swedroe's current opinion of managed futures funds is.

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Re: What's Wrong With AQR? (Managed Futures)

Post by lack_ey » Wed Apr 19, 2017 2:52 pm

nisiprius wrote:And I do wonder about something. AQMIX is a mutual fund, regulated by the Act of 1940, but--do I understand this correctly?--it's allowed to make investments in things that aren't. I don't need to understand this because I'm not investing in the fund, but if I were I would want to be sure that I did understand exactly what this means. It's my boldfacing, and I'm boldfacing both the "maybe not OK" and the "but maybe OK because" bits:
The Fund intends to make investments through the Subsidiary and may invest up to 25% of its total assets in the Subsidiary. Generally, the Subsidiary will invest primarily in commodity futures and swaps, but it may also invest in financial futures, option and swap contracts, fixed income securities, pooled investment vehicles, including those that are not registered pursuant to the 1940 Act, and other investments intended to serve as margin or collateral for the Subsidiary’s derivative positions. The Fund will invest in the Subsidiary in order to gain exposure to the commodities markets within the limitations of the federal tax laws, rules and regulations that apply to registered investment companies. Unlike the Fund, the Subsidiary may invest without limitation in commodity-linked derivative instruments, however, the Subsidiary will comply with the same 1940 Act asset coverage requirements with respect to its investments in commodity-linked derivatives that are applicable to the Fund’s transactions in derivatives. In addition, to the extent applicable to the investment activities of the Subsidiary, the Subsidiary will be subject to the same fundamental investment restrictions and will follow the same compliance policies and procedures as the Fund. Unlike the Fund, the Subsidiary will not seek to qualify as a regulated investment company under Subchapter M of the Code.
I have to say, too, that it sure looks to me as if mutual funds are increasingly finding tricky ways around the invent of the regulations that are supposed to put very strict limits on leverage in mutual funds.
The Cayman Islands subsidiary arrangement is a fairly common arrangement/loophole for a fund to effectively trade those futures while being overall structured as a normal 1940 Act fund (mutual fund or ETF, as it's used in both), to avoid having to distribute a K-1 tax form, etc.

For reference, DFA uses one for DFA Commodity Strategy Portfolio (DCMSX), while Vanguard also has one for Vanguard Alternative Strategies (VASFX). PIMCO Commodity Real Return Strategy (PCRIX) does as well. This goes back a while. On the other hand, the popular exchange-traded products PowerShares DB Commodity Index Tracking Fund (DBC) and iShares S&P GSCI Commodity Indexed Trust (GSG) are structured as commodities pools, though some in the space like First Trust Global Tactical Commodity Strategy Fund (FTGC) are '40 Act funds using subsidiaries.

Bitzer wrote:The domestic stock market has had an impressive upward trend over the past several years. Perhaps I'm missing something, but I'd be curious as to why AQR and other managed futures funds apparently haven't managed to profit from that trend.

I'd also be interested to know what Mr Swedroe's current opinion of managed futures funds is.
Most managers have many more positions than just the US market. Equities are just a part of it, and the US market hasn't been especially upward trending over some of those years, certainly less than some particular markets (even as the US overall beat ex-US overall).

I guess you could say that many probably did profit from it, just not enough to offset everything else.

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Re: What's Wrong With AQR? (Managed Futures)

Post by Trader/Investor » Wed Apr 19, 2017 3:16 pm

I generally ignore stuff that is presented as an innovative new ETF or mutual fund that for the first time finally makes it possible for Joe Sixpack to invest in sophisticated strategies that were once the exclusive province of hedge funds etc.

Thanks, probably the best singular quote I have read on this forum. I may shamelessly quote you on another forum. I have always said if anyone mentions "commodities" "futures" run as fast as you can for the exits. Their heyday were the 70s. Richard Dennis and others made millions upon millions in the 70s trading commodities and so the story began.

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Re: What's Wrong With AQR? (Managed Futures)

Post by grap0013 » Thu Apr 20, 2017 8:41 pm

https://www.portfoliovisualizer.com/bac ... tion3_2=10

QMHIX boosted returns in 2014 and 2015. Hurt returns in 2016. Shouldn't care though because stocks carried 2016. Don't confuse strategy with outcome and do not look at assets in isolation!

I'm drinking from the same punch bowl as tarheel. The more it goes down the more I like it. Definitely not correlated to anything. It will have it's day in the sun again.
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Re: What's Wrong With AQR? (Managed Futures)

Post by Random Walker » Fri Apr 21, 2017 2:05 pm

Grap and Tarheel,
I'm invested in QMHIX as well. I have a couple questions.
1. Why is TS Momentum invested in through Managed Futures rather than the investments themselves?
2. Does poor performance necessarily mean increased future expected return? With stocks, as prices go down expected returns necessarily go up. I too have faith that Momentum will work in the long run, but not sure I believe recent poor performance increases likelihood that future returns will be good.

Big reason I bought the fund was it's performance in extended bear markets for equities.

Dave

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Re: What's Wrong With AQR? (Managed Futures)

Post by grap0013 » Fri Apr 21, 2017 3:36 pm

Random Walker wrote:Grap and Tarheel,
I'm invested in QMHIX as well. I have a couple questions.
1. Why is TS Momentum invested in through Managed Futures rather than the investments themselves?
2. Does poor performance necessarily mean increased future expected return? With stocks, as prices go down expected returns necessarily go up. I too have faith that Momentum will work in the long run, but not sure I believe recent poor performance increases likelihood that future returns will be good.

Big reason I bought the fund was it's performance in extended bear markets for equities.

Dave
Dang, I wish we had Larry to answer. I can only speculate to the answers without doing some serious reading and googling.

1. Futures are cheaper and more liquid to trade?
2. Not sure on this one either. With no valuation basis I don't know if an asset can mean revert. It's one thing buying into an EM abyss when PEs are in the single digits and quite another buying into a TS MOM abyss "with no anchor". Good thing to ponder. I may investigate further.

grap
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Re: What's Wrong With AQR? (Managed Futures)

Post by lack_ey » Fri Apr 21, 2017 3:47 pm

grap0013 wrote:
Random Walker wrote:Grap and Tarheel,
I'm invested in QMHIX as well. I have a couple questions.
1. Why is TS Momentum invested in through Managed Futures rather than the investments themselves?
2. Does poor performance necessarily mean increased future expected return? With stocks, as prices go down expected returns necessarily go up. I too have faith that Momentum will work in the long run, but not sure I believe recent poor performance increases likelihood that future returns will be good.

Big reason I bought the fund was it's performance in extended bear markets for equities.

Dave
Dang, I wish we had Larry to answer. I can only speculate to the answers without doing some serious reading and googling.

1. Futures are cheaper and more liquid to trade?
2. Not sure on this one either. With no valuation basis I don't know if an asset can mean revert. It's one thing buying into an EM abyss when PEs are in the single digits and quite another buying into a TS MOM abyss "with no anchor". Good thing to ponder. I may investigate further.

grap
1. For sure, the futures are easy to trade, especially on the short side. It's a lot cheaper and more convenient to do it this way, and for many of the categories, you can't readily even invest directly in these anyway. e.g. commodities. Also, with futures you can adjust and manage the leverage and net investment easily, and don't have to worry about margining etc.

2. I've always assumed that this kind of strategy doesn't particularly have mean reversion in the sense of long-only assets where depressed prices mean higher yields and so on. But don't know for sure. It's a good question. It seems like you could readily check serial correlation and test various things for momentum factor returns, but I don't know where to find TS MOM data.

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Re: What's Wrong With AQR? (Managed Futures)

Post by Random Walker » Fri Apr 21, 2017 4:31 pm

Grap and lack_ey,
Your answers are exactly what I was thinking. No kidding, I wish Larry were here as well. Have you guys seen the AQR paper on Managed Futures with the "smile curve"? TS MOM does best when there is significant extended trend in the market, either up or down. That's why I doubt there is any sort of mean reversion. But there is the long term history of TS Momentum for us to count on. And if I recall, it's Sharpe ratio is even greater than market beta. In fact I think it's the most persistent of all the factors.
I own QMHIX in a taxable account. It's very tax inefficient. I only created the position because I was taking away from the bond side (Muni ladder) to create the position. Bit of a gambler instinct and part rationalized by the smile curve performance in extended bears.

https://www.aqr.com/~/media/files/paper ... esting.pdf

Dave

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Re: What's Wrong With AQR? (Managed Futures)

Post by grap0013 » Fri Apr 21, 2017 4:34 pm

My source whom I'll refer to as "Barry" says poor TS MOM returns do not portend higher future returns. So no mean reversion.
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Re: What's Wrong With AQR? (Managed Futures)

Post by Random Walker » Fri Apr 21, 2017 4:39 pm

I bet "Barry" is a pretty good source! :-)

Dave

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Re: What's Wrong With AQR? (Managed Futures)

Post by tarheel » Sat Apr 22, 2017 5:57 am

Random Walker -

Good questions.

1. I also thought in general it was because of the investability of the futures contracts. But keep in mind that there are other types of TS Momentum funds - I look at Managed Futures as one approach of many. Other TS Momentum finds may indeed buy investments themselves. These often have different return profiles.

2. I suspected no mean reversion with TS MOM, but good to hear from Barry :P It makes sense.

I've also been thinking lately just what -15% means in a high volatility fund. It's something like just outside one SD negative or so. By no means a huge deal. Remember QMHIX specifically targets 15% annual volatility. Of course I wish it was always positive :annoyed

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Re: What's Wrong With AQR? (Managed Futures)

Post by Angst » Sat Apr 22, 2017 6:58 am

It would be nice to stay in touch with Barry and keep up on the growth of his garden...

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Re: What's Wrong With AQR? (Managed Futures)

Post by grap0013 » Sat Apr 22, 2017 10:43 am

Random Walker wrote:Grap and lack_ey,
Your answers are exactly what I was thinking. No kidding, I wish Larry were here as well. Have you guys seen the AQR paper on Managed Futures with the "smile curve"? TS MOM does best when there is significant extended trend in the market, either up or down. That's why I doubt there is any sort of mean reversion. But there is the long term history of TS Momentum for us to count on. And if I recall, it's Sharpe ratio is even greater than market beta. In fact I think it's the most persistent of all the factors.
I own QMHIX in a taxable account. It's very tax inefficient. I only created the position because I was taking away from the bond side (Muni ladder) to create the position. Bit of a gambler instinct and part rationalized by the smile curve performance in extended bears.

https://www.aqr.com/~/media/files/paper ... esting.pdf

Dave
That smiley face paper was the final piece to convince me to take a 5% stake in TS MOM. There is an benchmark for this asset class back to 2001. ~6% annualized with real funds. Current periods like now are typical. I don't think a few more retail investors investing here will change anything intrinsic about the strategy. With the HV fund, I still have expected returns estimated at 8% nominal with 2% inflation.
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Re: What's Wrong With AQR? (Managed Futures)

Post by lack_ey » Sat Apr 22, 2017 11:14 am

grap0013 wrote:That smiley face paper was the final piece to convince me to take a 5% stake in TS MOM. There is an benchmark for this asset class back to 2001. ~6% annualized with real funds. [emphasis added] Current periods like now are typical. I don't think a few more retail investors investing here will change anything intrinsic about the strategy. With the HV fund, I still have expected returns estimated at 8% nominal with 2% inflation.
The benchmark does represent live trading, but it's based on voluntary reporting, right? And a decent percentage of the theoretical historical return depends on the asset weighting and rebalancing scheme.

In any case, nothing of this nature works all the time and with a given vol these kinds of losses happen now and then, no matter what the underlying average return might be. It's not inconsistent with an investment that loses you 5% a year over time, or one that gains 5% a year.

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Re: What's Wrong With AQR? (Managed Futures)

Post by jimb_fromATL » Sat Apr 22, 2017 11:59 am

cheapskate wrote:I have a small allocation in AQMIX and QMHIX. They are wonderfully mis-correlated with the markets. They go down regardless of what the equity markets or fixed income markets do :), I have large losses in them over the past 2+ years (nearly 3 maybe).

On the plus side, they have been great for TLH. I have been consistently locking in losses moving between AQMIX and QMHIX. But I am concerned I can't do that any more after they go to near 0 :)
You might want to look at RYJUX ... which came up for discussion recently. It has a much longer history of losing money ... and perhaps with more volatility.

Here's the dilemma I'd face if I were trying to choose between them. Should I invest in them, or put my money in a paper bag and set it on fire? If it were the latter, would it be better to run over it with a power lawn mower, or to throw it out the window while driving down the freeway? Should I diversify more by throwing some out on the freeway and some in residential and industrial districts? Should I destroy it all in one lump sum, or DCA over a period of time? :confused

jimb

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Re: What's Wrong With AQR? (Managed Futures)

Post by Neffles » Sat Apr 22, 2017 3:27 pm

Along those lines, larger sized funds can also make you the target. It’s a zero sum game in futures, which often means people come after the largest “stack” at the table, creating a sub culture of prop shops and traders who attempt to reverse engineer the large fund’s models to make educated guesses as to when and where billions of dollars will be coming into this market and that. If you have to not only beat the market, but also the other players at the table, it sure pays to know what the largest of those players are doing.

Finally, large sized funds concentrates the portfolio into financial markets, making it reliant on trends in currencies, bonds, and stock indices to turn a profit. And it’s that angle, more than anything else, which is “the problem” in our opinion. So not size, per se, but the portfolio construction decisions made in order to effectively achieve that size.
Competing against others that are actively trying to take advantage of you in a zero sum game? And paying a handsome fee to get into the game? I won't pretend to understand how these funds work, but I think I'll pass.
You might want to look at RYJUX ... which came up for discussion recently. It has a much longer history of losing money ... and perhaps with more volatility.

Here's the dilemma I'd face if I were trying to choose between them. Should I invest in them, or put my money in a paper bag and set it on fire? If it were the latter, would it be better to run over it with a power lawn mower, or to throw it out the window while driving down the freeway? Should I diversify more by throwing some out on the freeway and some in residential and industrial districts? Should I destroy it all in one lump sum, or DCA over a period of time? :confused

jimb
:D

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Re: What's Wrong With AQR? (Managed Futures)

Post by garlandwhizzer » Sat Apr 22, 2017 3:37 pm

nedsaid wrote:
Buy good stuff and keep it. I like to own things because of their intrinsic value and not so much for they might hedge against unpredictable human nature and behavior. I want to own something because it is valuable and will increase in value over time and not because of what I think other market participants will do over the short term
1+

I completely agree with nedsaid's approach and I attempt to do it myself. Although it is sometimes hard not to fiddle with the portfolio it's usually best for me when I keep that to a minimum and completely avoid alt approaches. To achieve diversification alt asset investing involves increased costs and complexity relative to bonds in my view and, importantly, is dirt cheap. Alt assets will eventually have their day in the sun, but will that make up for the lost opportunity during their years of underperformance during a bull market?

I also couldn't help but get a few belly laughs from of the comments by cheapskate and jimb_from ATL, both could be comedy writers IMO. They humorously make an important point. The investing mainline is low cost long only equity indexes, whether they be cap-weighted or factor-tilted, with an appropriate mix of bonds for safety. When you venture away from this and into exotic investment strategies with a significant percentage of your portfolio, it is important to recognize that it may or may not work to your benefit over your particular time frame regardless of underlying backtesting theory. If you're Mr. Moneybags and all you need to do is to preserve your excessive wealth with or without growth, alt investing may be a very rational approach. It offers some downside protection whether or not it produces upside gains. Some smart people choose to do it and some do not. I hope I'm smart (group 1), but I know for sure that I'm in group 2 when it comes to investing.

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Re: What's Wrong With AQR? (Managed Futures)

Post by Random Walker » Sat Apr 22, 2017 4:06 pm

Garlandwhizzer,
Speaking of a specific individual time period, the longer the time period the more likely the various factors are to come near their expected returns. Never a guarantee, but more likely. The shorter the individual's time period, the more unpredictable it is what the outcome for any given factor is. So when thinking in terms of finite specific single time periods, doesn't it make sense to diversify across as many factors as possible? In fact, I think one can make the argument that the shorter the time period, the more important it may be to diversify across potential sources of return.

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Re: What's Wrong With AQR? (Managed Futures)

Post by cheapskate » Sat Apr 22, 2017 4:37 pm

jimb_fromATL wrote: Here's the dilemma I'd face if I were trying to choose between them. Should I invest in them, or put my money in a paper bag and set it on fire? If it were the latter, would it be better to run over it with a power lawn mower, or to throw it out the window while driving down the freeway? Should I diversify more by throwing some out on the freeway and some in residential and industrial districts? Should I destroy it all in one lump sum, or DCA over a period of time? :confused
jimb
All your ideas are more thrilling, but they give me no bragging rights :(, and I need something bad - the rest of my portfolio is in Vanguard, I buy clothes and shoes at Costco and drive Toyotas. But at least I claim that I partner with investing Geniuses (while quietly polling for losses I can harvest).

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Re: What's Wrong With AQR? (Managed Futures)

Post by garlandwhizzer » Sat Apr 22, 2017 10:09 pm

Random Walker wrote:
So when thinking in terms of finite specific single time periods, doesn't it make sense to diversify across as many factors as possible? In fact, I think one can make the argument that the shorter the time period, the more important it may be to diversify across potential sources
You have a point regarding time period. One other point: when you don't know what the future holds, beta is not a bad default setting.

The problems with multi-factor fund investing are I see it (granted I am not a multi-factor fund adherent) are details in construction and management of the portfolio? There is a long time horizon of academic backtesting research that presents compelling arguments for multi-factor approaches but only a relatively short time horizon for real funds with real costs. I suggest that the nuts and bolts of which, if any, approach actually works in the real world where there are trading costs and frictions, where shorting stocks is expensive, prohibitively so in the SC space are not known at present. For example MOM and V are strongly negatively correlated. In the end maximizing one premium tends to destroy the the other. If you lose a long/short approach, MOM exposure winds up shorting V exposure and V winds up shorting MOM. In sum after costs you're very lucky to break even due to no real gain and increased costs. If you use long only approach equal weighted with V and MOM, you wind up with a portfolio that has V diluted and MOM diluted, still unlikely to have net positive results relative to TSM after costs. Probably the best you can do if you wish to combine V and MOM is as Robert T advocates: get a lot of SCV and add a little MOM with MTUM which is one of the very few cost effective approaches to harvesting MOM because it focuses on the long-only LC space where trading doesn't eat up all the alpha. But we're omitting all SC and most MC and omitting also shorting which automatically reduces the premium by about 75% before costs. But that's not the end of the bad news. Bear in mind that frequent trading strategies like MOM are very popular with hedge funds that like to play in the LC MOM space, extremely competitive due to their presence, lots of trade front-running, so you'd be lucky to harvest a fraction of that remaining premium before costs considerably less after costs. That's the real world.

This is but one example of the difficulties involved in the actual construction of a multi-factor portfolio, there are others. How frequently should trading occur? Should it be the same frequency for all factors? Which factors should be overweighted, which underweighted? How much SC, how much MC, how much LC?

Such an approach is theoretically very attractive from both a return and a volatility standpoint, but I believe in this relatively new arena there is likely a learning curve for funds and harvesting outsized returns will not be a given. I suspect the average returns for all funds and efts that follow multi-factor investing strategies will be less than beta after costs, but I could be wrong There are some factors that fit better together--value and quality (Buffett's favorite) for example, but that can be hard to find with so much money chasing after quality firms (strong excellent companies) that are on sale as if they weren't. Most firms like that don't go on sale often, one reason Warren doesn't buy regularly, only when opportunity presents itself rather than at the behest of a fixed factor formula. In sum, IMHO multi-factor investing is very appealing in terms of its potential but harvesting its benefits after costs, particularly as more and more money flows into that strategy which will occur, may not turn out to be as easy as it appears on backtesting. IMO markets get more efficient all the time and it gets harder and harder to obtain alpha from any source.

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Re: What's Wrong With AQR? (Managed Futures)

Post by heyyou » Sun Apr 23, 2017 2:26 am

Barely on topic: An alternative to wanting investments that perform better during poor markets, is expecting to adapt your retirement spending to your recent portfolio value. If most of your necessary expenses are covered by steady income streams (SS, annuities, pension, bond ladders), variable withdrawals from your portfolio would be supporting only your discretionary spending.

At the start of retirement with a no-COLA pension, when I most feared high inflation, commodities futures funds(CCFs) were being touted as having income from the multiple sources of (1) interest from the collateral, but interest rates fell, and (2) profit from the rolling of the futures contracts (but commodities prices fell). Long term, patiently owning equities has outgrown inflation, negating the need for CCFs. The new product is "managed futures" but the roll out marketing of it has the same feel as CCF's introduction, 15 years ago.

My suggestion is to look within yourself for how to adapt to poor markets instead of purchasing Wall Street's latest offerings that promise to protect you from future risks. Somehow, the future seldom fits exactly what occurred in the past. Note that Manhattan Island was first sold for $24 of shiny beads, and the marketing of sparkling new investments has continued since then.

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Re: What's Wrong With AQR? (Managed Futures)

Post by nedsaid » Sun Apr 23, 2017 10:25 am

garlandwhizzer wrote:
The problems with multi-factor fund investing are I see it (granted I am not a multi-factor fund adherent) are details in construction and management of the portfolio?

Nedsaid: A big problem is that most managers are good at maybe one or two styles of investing. As Garland says below, Warren Buffett excels at combining Value and Quality. The guy is a genius and the best he can do is two. I suppose the rise of the robots will overcome human limitations as there is a limit to what even the most brilliant human mind can wrap its brain around. A lot of concepts to juggle and keep in the air at the same time.

There is a long time horizon of academic backtesting research that presents compelling arguments for multi-factor approaches but only a relatively short time horizon for real funds with real costs.

Nedsaid: Yes, there is the old problem of implementation costs. What looks easy when backtesting data is harder to implement in real life.

I suggest that the nuts and bolts of which, if any, approach actually works in the real world where there are trading costs and frictions, where shorting stocks is expensive, prohibitively so in the SC space are not known at present. For example MOM and V are strongly negatively correlated. In the end maximizing one premium tends to destroy the the other. If you lose a long/short approach, MOM exposure winds up shorting V exposure and V winds up shorting MOM. In sum after costs you're very lucky to break even due to no real gain and increased costs. If you use long only approach equal weighted with V and MOM, you wind up with a portfolio that has V diluted and MOM diluted, still unlikely to have net positive results relative to TSM after costs.

Nedsaid: I think it is more complicated than this as leverage is also used but your basic point is correct, there is a certain amount of cancelling effect. Of course, Mr. Asness is well aware of this. What I am more concerned about are market extremes, in a panic most anything can happen and probably will happen, my concern is that unexpected market behavior could put a fund like this in danger in a hurry. The use of leverage and shorting magnifies market risk. The AQR team is unquestionably brilliant but I wonder about a strategy that has so many moving parts.

Probably the best you can do if you wish to combine V and MOM is as Robert T advocates: get a lot of SCV and add a little MOM with MTUM which is one of the very few cost effective approaches to harvesting MOM because it focuses on the long-only LC space where trading doesn't eat up all the alpha.

Nedsaid: This sounds about right.

But we're omitting all SC and most MC and omitting also shorting which automatically reduces the premium by about 75% before costs.

Nedsaid: Here is a question. Could a smaller investor short in the Small-Cap and Mid-Cap space where a giant like AQR could not? Or are the costs just too high?

But that's not the end of the bad news. Bear in mind that frequent trading strategies like MOM are very popular with hedge funds that like to play in the LC MOM space, extremely competitive due to their presence, lots of trade front-running, so you'd be lucky to harvest a fraction of that remaining premium before costs considerably less after costs. That's the real world.

Nedsaid: It does seem to get harder and harder doesn't it? We hear about the high-frequency trading a lot these days, the flip side is that markets are more liquid and efficient.

This is but one example of the difficulties involved in the actual construction of a multi-factor portfolio, there are others. How frequently should trading occur? Should it be the same frequency for all factors? Which factors should be overweighted, which underweighted? How much SC, how much MC, how much LC?

Nedsaid: This gets to be pretty sophisticated stuff. You have to model which factors are better values than others. I remember a discussion with bjr89 and we had a spirited exchange on a related subject. He said that there was a lot of optimism in Value. He also said that the Sharpe Ratio for Value was high. I shot back and asked if higher returns per unit of risk wasn't exactly what investors were looking for. He said that he had formerly worked for hedge funds and that a high Sharpe Ratio was a sign of hedge fund optimism and that Value had been "bid up" by hedge funds. I wish he would weigh in as I am paraphrasing our discussion. In other words, what happens when there is no value in Value? You get to overweighting the "cheap" factors and underweighting the "expensive" factors. Not sure how you would value a factor.

Such an approach is theoretically very attractive from both a return and a volatility standpoint, but I believe in this relatively new arena there is likely a learning curve for funds and harvesting outsized returns will not be a given. I suspect the average returns for all funds and efts that follow multi-factor investing strategies will be less than beta after costs, but I could be wrong.

Nedsaid: There is also a "late to the party effect" which we saw with David Swenson and alternative investments. College endowments that tried to copy Swenson's strategy could not match his results and some actually underperformed a plain vanilla 60/40 balanced portfolio. I suspect that other endowment funds didn't have the brainpower of Yale's team.

Another question. How much does Mr. Asness invest in his own funds at AQR? If it were substantial, I would feel better about such investments. Also, how much more does the retail investor in such funds pay in expenses than Asness himself?

What I am trying to say is that in such alternative strategies, that retail investors often get the crumbs. I think AQR is trying very hard to cut the retail investor a better deal. Another factor is investor access, if I have to hire an advisor to get access to such funds then my returns would be reduced even further.


There are some factors that fit better together--value and quality (Buffett's favorite) for example, but that can be hard to find with so much money chasing after quality firms (strong excellent companies) that are on sale as if they weren't. Most firms like that don't go on sale often, one reason Warren doesn't buy regularly, only when opportunity presents itself rather than at the behest of a fixed factor formula.

Nedsaid: Mr. Buffett has commented that this is getting harder for him to do as his asset base has gotten larger and larger. Plus, a lot of smart people have reverse engineered his success and have figured out (at least in part) how he did it. There is more competition out there.


In sum, IMHO multi-factor investing is very appealing in terms of its potential but harvesting its benefits after costs, particularly as more and more money flows into that strategy which will occur, may not turn out to be as easy as it appears on backtesting. IMO markets get more efficient all the time and it gets harder and harder to obtain alpha from any source.

Nedsaid: Had I low-cost access, and my portfolio big enough, I would probably buy into such funds and place them in a portion of my portfolio set aside as a laboratory. You really only learn when you own such investments yourself and see how they react in the real world. There are Bogleheads out there that have been pleased with QSPIX, the AQR Style Premia Alternative I fund. Larry Swedroe recommended it. My understanding is that the fund closed to new investors.

But again, investors should be prepared to be disappointed from time to time even if these funds work as design. No investment strategy works 100% of the time. I would like to see how such funds work in real life. In some cases, so far so good. In other cases, disappointment.



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Re: What's Wrong With AQR? (Managed Futures)

Post by lack_ey » Sun Apr 23, 2017 11:40 am

heyyou wrote:Barely on topic: An alternative to wanting investments that perform better during poor markets, is expecting to adapt your retirement spending to your recent portfolio value. If most of your necessary expenses are covered by steady income streams (SS, annuities, pension, bond ladders), variable withdrawals from your portfolio would be supporting only your discretionary spending.

At the start of retirement with a no-COLA pension, when I most feared high inflation, commodities futures funds(CCFs) were being touted as having income from the multiple sources of (1) interest from the collateral, but interest rates fell, and (2) profit from the rolling of the futures contracts (but commodities prices fell). Long term, patiently owning equities has outgrown inflation, negating the need for CCFs. The new product is "managed futures" but the roll out marketing of it has the same feel as CCF's introduction, 15 years ago.

My suggestion is to look within yourself for how to adapt to poor markets instead of purchasing Wall Street's latest offerings that promise to protect you from future risks. Somehow, the future seldom fits exactly what occurred in the past. Note that Manhattan Island was first sold for $24 of shiny beads, and the marketing of sparkling new investments has continued since then.
Managed futures has been around for decades. If anything it has the problem of having way too much capital invested in it (hundreds of billions of dollars). Where's the new push? Is it even gaining significantly more traction in the retail space?

There are a lot of hyperbolic promises made about every asset class, strategy, and subcategory. That doesn't in of itself make any investment a good or bad idea. It would be better to just directly address the underlying rationale of the strategy, the properties, pros and cons, etc.

The idea behind holding anything that isn't stocks is to get some kind of return, not just over "poor markets" but a range of possible outcomes that could stretch on for decades. That goes for bonds as well, which are solidly economically justified as a positive source of return (above cash) but have their weaknesses as well.

The problem with a construction like managed futures is that all else equal, in a world without trends beyond chance, you expect zero returns over a business cycle before costs and obviously negative returns after costs and fees. So this is just a bet that trend behavior across asset classes exists and can (still) be captured these days in the futures markets in a way that provides sufficient return for the risk after cost. The return for a given fund will depend significantly on the leverage ratio, asset weighting, rebalancing, momentum signals, investment universe, and so on, so it is readily possible for some in the category to be making money while others do not, perhaps even over the long term.

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Re: What's Wrong With AQR? (Managed Futures)

Post by nisiprius » Sun Apr 23, 2017 8:10 pm

Random Walker wrote:...Big reason I bought the fund was its performance in extended bear markets for equities...
:?: :?: :?: :?: :?:
The fund's inception was 7/16/2013. How does anyone know anything about its performance in "extended bear markets for equities?"
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Re: What's Wrong With AQR? (Managed Futures)

Post by packer16 » Sun Apr 23, 2017 8:29 pm

The biggest issue I have with commodities is its expected return is their price changes over time which has been negative plus the risk-free rate to carry. With stocks & bonds you have cash flows from either growing businesses or taxes. One issue with commodity returns is the starting point. If you start in the late 60s you have to deal with the change from regulated to unregulated commodities markets.

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Re: What's Wrong With AQR? (Managed Futures)

Post by Random Walker » Sun Apr 23, 2017 8:40 pm

Nisiprius,
See the AQR paper above I referenced. Not looking at actual data, but how TS MOM would have behaved in prior periods in past. And how the strategy would reasonably be expected to behave selling short into a long bear.

Packer,
The fund is diversified across equities, bonds, currencies, commodities. It's truly an investment in TS MOM rather than any specific asset class.

Dave

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Re: What's Wrong With AQR? (Managed Futures)

Post by lack_ey » Sun Apr 23, 2017 8:46 pm

nisiprius wrote:
Random Walker wrote:...Big reason I bought the fund was its performance in extended bear markets for equities...
:?: :?: :?: :?: :?:
The fund's inception was 7/16/2013. How does anyone know anything about its performance in "extended bear markets for equities?"
Fund inception is 5 January 2010 for the base AQR strategy in mutual fund format. The fund mentioned was the high volatility version that is 50% more leveraged but should have overall relatively similar properties (both should roughly be making money and losing money at the same time and be highly correlated, though over longer periods the leverage rebalancing can cause some drift in relative performance).

Still, that does not show performance in extended bears either.

This assertion seems to be founded on (1) the very long-term strategy backtests available (these indicate the results being claimed, at least on average) and (2) economic theory. There are multiple ways for a bear market to evolve, but if you have strongly downtrending equity behavior, a managed futures construction of the type AQR is running should be shorting equities by that point. So there resultingly some reasonably some extreme left-tail hedging properties to a limited degree. The fund should be long and short a wide number of other assets as well, so the impact of equity positions should be constrained.

Any and all financial relationships are subject to change in the future, but this is a reasonable interpretation of history with a decent possibility of continuing. The phrasing is more confident than I would choose but I think the substance is fine.
packer16 wrote:The biggest issue I have with commodities is its expected return is their price changes over time which has been negative plus the risk-free rate to carry. With stocks & bonds you have cash flows from either growing businesses or taxes. One issue with commodity returns is the starting point. If you start in the late 60s you have to deal with the change from regulated to unregulated commodities markets.

Packer
Which doesn't really directly relate to managed futures, which are in most constructions and certainly with the AQR products not net long in commodity futures over a cycle, right...? There was some discussion of CCFs above but you didn't quote any of it so I thought this should be clarified.

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Re: What's Wrong With AQR? (Managed Futures)

Post by packer16 » Sun Apr 23, 2017 9:10 pm

Whatever they are investing in appears to have significantly underperformed a balance index fund (2.6% vs. 10.2% over 7 years) with you paying an expense ratio of 1.2% for this priviledge.

If they are not net long then they are trying to harvest a premium using emperically derived factors, which IMO is a black box, & shareholders are paying the for priviledge to test whether the black box works. Good luck.

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Re: What's Wrong With AQR? (Managed Futures)

Post by stemikger » Mon Apr 24, 2017 8:20 am

tarheel wrote:From the article: "In the end, we don’t believe there’s anything wrong with AQR’s managed futures offering. It’s doing what it was designed to do, keeping its powder dry and suffering consistent losses in exchange for future outlier-type gains."

People investing in these strategies need to know what they are doing, why they are invested, and need to be in them for the long term. This stuff is not for the average Boglehead. I have a 7.5% allocation to QMHIX and have lost ~15% since my initial allocation. I'm not concerned, and think the fund is doing what it's supposed to do. When a new trend arises, it will pick up on it.

On one of Covel's trend following podcasts someone gave a great analogy for these funds. It's like sitting in a chair on a sidewalk in NYC. Most of the time it's a miserable experience, with people slamming into you and giving you problems.....but when the parade comes by, you simply couldn't have a better spot.

Honestly, if anything I've been thinking about increasing my allocation.......
Thanks for explaining it in idiot terms. lol.

I agree it is definitely not for this Boglehead, but I see why one would do it.
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Re: What's Wrong With AQR? (Managed Futures)

Post by grap0013 » Mon Apr 24, 2017 10:28 am

While I appreciate some of the posts, "just save more, too complicated, look at LTCM, etc...." they do not add a lot to the nuts and bolts discussion of the strategy. Those posts always show up several times in every ALT or tilting discussion. Do you see me chime in on 3 fund portfolio or target date threads and try to convince people to tilt? Nope.

Everybody in this thread who is allocating to TS MOM is aware of the risks of the strategy. This is not our first rodeo. Don't make me bust out my actual non-Beardstown Lady return data going to 2006! :) Drawn out point is this, those of us investing in TS MOM 5-10% are going to be fine. If you are going to tell me to save more rather than invest in QMHIX etc..., your time would be better spent helping a new poster with their first 401K.
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Re: What's Wrong With AQR? (Managed Futures)

Post by Theoretical » Mon Apr 24, 2017 11:42 am

grap0013 wrote:While I appreciate some of the posts, "just save more, too complicated, look at LTCM, etc...." they do not add a lot to the nuts and bolts discussion of the strategy. Those posts always show up several times in every ALT or tilting discussion. Do you see me chime in on 3 fund portfolio or target date threads and try to convince people to tilt? Nope.

Everybody in this thread who is allocating to TS MOM is aware of the risks of the strategy. This is not our first rodeo. Don't make me bust out my actual non-Beardstown Lady return data going to 2006! :) Drawn out point is this, those of us investing in TS MOM 5-10% are going to be fine. If you are going to tell me to save more rather than invest in QMHIX etc..., your time would be better spent helping a new poster with their first 401K.
Exactly. It's about respect. I have 0 problem recommending someone to the Three Fund Portfolio (though I do recommend the Intermediate bond fund, intermediate treasuries, or CDs rather than BND because of the MBSs) and I don't recommend tilt strategies unless the poster has asked about it.
If you are going to tell me to save more rather than invest in QMHIX etc..., your time would be better spent helping a new poster with their first 401K.
While there are people tempted to juice their returns so they can save less, many other people are tilting so that with the amount they save, which would be the same regardless of portfolio choices, they've got different subsets of risk than just beta and term risk (or maybe those two and credit). If anything, I bet many tilters are likely to save more with a strategy they believe is more risk-diversified and diffuse than they would if all they could get is beta and term.

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Re: What's Wrong With AQR? (Managed Futures)

Post by bjr89 » Mon Apr 24, 2017 2:01 pm

Nedsaid, what I was saying about Value's historically high Sharpe is that it has attracted a lot of capital since it has performed too well given its volatility in the past. As prices are bid up, expected returns should fall, and should at least place its go forward Sharpe more in line with other asset classes, if not below. There's a capacity to this stuff.

With regard to managed futures, I wouldn't touch AQR's product with a ten foot pole. They specialize in selling well known anomalies in their most basic form. For example, their momentum stock funds just buy the top third performing stocks in the given universe over the past year ex most recent month. Textbook momentum. But look at their performance since inception. They have all underperformed their benchmarks. Problem is, when it comes to alpha, (and trying to generate returns via momentum is pure alpha since any risk based explanation you hear for MOM is BS), it's zero sum and should go away. To reliably generate alpha you need insight into something that not everyone else is doing. You have to be different and your method needs to be kept a secret (Ren Tec). Sad thing is Cliff knows this. But hey, he's just become a billionaire peddling basic factors that everyone knows about and are therefore willing to believe in and invest in and stick with through thick and thin. What's wrong with AQR? It's a scam.

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Re: What's Wrong With AQR? (Managed Futures)

Post by Random Walker » Mon Apr 24, 2017 2:47 pm

Bjr89,
I disagree with you on a Point or two. You said people who invest in TS MOM are looking for alpha. No, we are actually just looking for a different kind of beta. We appreciate that TS MOM is well known, but it is at least partly because it has been well known for 20 years and has still not been arbitraged away that we invest in it. We also invest in it because there are very rational (although not risk based) explanations that allow us to expect it to continue. We are just looking for low cost, passive, formulaic, access to another factor. If we were looking for alpha, we'd be looking for someone to produce above and beyond the factor through security selection or subjective market timing. I realize that by Boglehead standards, the ER is insane, but the fund provides a unique source of return, and expected returns are after expenses. What really matters is how TS MOM mixes in a portfolio, and it has some serious potential there. That's not alpha, but it is potentially improved portfolio efficiency. People who tilt or combine different less than perfectly correlated sources of return in a portfolio aren't looking for alpha. They are looking to passively improve portfolio efficiency by diversifying across potential sources of return.

Dave

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Re: What's Wrong With AQR? (Managed Futures)

Post by lack_ey » Mon Apr 24, 2017 2:47 pm

bjr89 wrote:Nedsaid, what I was saying about Value's historically high Sharpe is that it has attracted a lot of capital since it has performed too well given its volatility in the past. As prices are bid up, expected returns should fall, and should at least place its go forward Sharpe more in line with other asset classes, if not below. There's a capacity to this stuff.

With regard to managed futures, I wouldn't touch AQR's product with a ten foot pole. They specialize in selling well known anomalies in their most basic form. For example, their momentum stock funds just buy the top third performing stocks in the given universe over the past year ex most recent month. Textbook momentum. But look at their performance since inception. They have all underperformed their benchmarks. Problem is, when it comes to alpha, (and trying to generate returns via momentum is pure alpha since any risk based explanation you hear for MOM is BS), it's zero sum and should go away. To reliably generate alpha you need insight into something that not everyone else is doing. You have to be different and your method needs to be kept a secret (Ren Tec). Sad thing is Cliff knows this. But hey, he's just become a billionaire peddling basic factors that everyone knows about and are therefore willing to believe in and invest in and stick with through thick and thin. What's wrong with AQR? It's a scam.
Do you have any ideas about determining which things "should" go away and measuring the extent to which things have already gone away? Can these be quantified or formalized?

In general would you say there exist profitable trading strategies that people know about, or is unique information a requirement? Can common knowledge alone wipe out the forward returns? What if there's not enough money chasing the trade relative to the other investment? As you mention, additional investment into the strategy should result in assets getting bid up, though that's the opposite of what's happened with value the last 10 years (the spread in valuations between value and growth has widened rather than narrowed). What would you say is the equilibrium level profitability for the currency carry trade over the long run (0?) and are we there yet?

I don't really think anybody is looking for consistent performance via well discussed, known, academic research-style factors so I find it hard to understand AQR as a scam. They advertise themselves as offering non-market betas (rather than true alpha), and presumably most people understand that's what they're getting for better or worse, so I don't see the level of fraud that would constitute a scam.

bjr89
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Re: What's Wrong With AQR? (Managed Futures)

Post by bjr89 » Mon Apr 24, 2017 3:01 pm

The idea of smart beta is fraudulent. There is no such thing. There are fair market returns to assets (betas) and there are returns to investment strategies (alphas). No in between. Momentum of any sort is definitely is alpha. It is not an asset. And the evidence of it being arb'd are the negative returns that you've experienced. By definition it has been operating above capacity.

lack_ey
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Re: What's Wrong With AQR? (Managed Futures)

Post by lack_ey » Mon Apr 24, 2017 3:13 pm

bjr89 wrote:The idea of smart beta is fraudulent. There is no such thing. There are fair market returns to assets (betas) and there are returns to investment strategies (alphas). No in between. Momentum of any sort is definitely is alpha. It is not an asset. And the evidence of it being arb'd are the negative returns that you've experienced. By definition it has been operating above capacity.
Wait, so you would define excess return from 3-factor value as alpha? (let's just suppose the return has a positive sign for now over some observation period)

And do negative returns really imply a strategy is above capacity? Examined over what time period? Virtually every strategy loses money sometimes, right? Some more than others. All long asset exposures lose money a lot of the time too. Do you really mean a binary distinction here? Or you believe that a positive-returning strategy cannot have a negative return over any given observation (bad luck, etc.)?

Wait, backing up, do you consider returns as deterministic but unknown, or probabilistic?

I don't invest in any managed futures btw.

bjr89
Posts: 131
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Re: What's Wrong With AQR? (Managed Futures)

Post by bjr89 » Mon Apr 24, 2017 3:42 pm

To the extent that value premiums result in significantly higher Sharpe ratios than other betas over long periods, that is ex post alpha as it implies mispricing.

Negative returns to an alpha imply either an imperfect pricing model (and none are perfect) or excess capacity. I don't see why you're mixing alpha and beta here though. No such thing as bad luck or noise.

Returns (i.e. the future) are deterministic/unknown while models are probabilistic.

NiceUnparticularMan
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Re: What's Wrong With AQR? (Managed Futures)

Post by NiceUnparticularMan » Mon Apr 24, 2017 3:52 pm

bjr89 wrote:To the extent that value premiums result in significantly higher Sharpe ratios than other betas over long periods, that is ex post alpha as it implies mispricing.
Or it implies Sharpe ratios don't measure all relevant risks.

bjr89
Posts: 131
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Re: What's Wrong With AQR? (Managed Futures)

Post by bjr89 » Mon Apr 24, 2017 3:57 pm

Sure unrealized risk would not be reflected in a Sharpe ratio. But over a long enough period and when there is a reasonable behavioral story to back up at least partial mispricing...

NiceUnparticularMan
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Re: What's Wrong With AQR? (Managed Futures)

Post by NiceUnparticularMan » Mon Apr 24, 2017 3:59 pm

bjr89 wrote:Sure unrealized risk would not be reflected in a Sharpe ratio.
It could have been realized, just not measured with the very limited information that goes into a Sharpe ratio.

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