My Favorite Alternative Funds

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grok87
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Re: My Favorite Alternative Funds

Postby grok87 » Sat Jul 15, 2017 7:39 pm

Avo wrote:
grok87 wrote:2) Fama and French don't believe in the value premium any more either.

This is not at all what they say.

The paper (linked from your Forbes link) was first published in 2013 (final revision in 2014), so it's not exactly new:

https://papers.ssrn.com/sol3/papers.cfm ... id=2287202

The last sentence of the abstract reads "With the addition of profitability and investment factors, the value factor of the FF three-factor model becomes redundant for describing average returns in the sample we examine."

This does not mean that the value premium doesn't exist, but just that there is more than one way of measuring it. Which has been known for a long time.

THanks Avo.

Maybe to move onto something actionable...

I guess the question is (at least for me), is it better to invest in a Large Cap Value fund or a Large Cap "High Profitability/Low Investment" Fund (assuming you could find one).

I don't know the answer to this but I suspect that the latter might better avoid value traps.

Would be interested in what you and Robert think..
"...people always live for ever when there is any annuity to be paid them"- Jane Austen

gtwhitegold
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Re: My Favorite Alternative Funds

Postby gtwhitegold » Sat Jul 15, 2017 10:49 pm

My wife and I hold QSPNX and QMHNX in our Fidelity accounts and will consider other alternative funds if they are accessible without an advisor and they are worth their costs. I've considered investing in other managed futures funds, but the costs are too high for my taste.

Avo
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Re: My Favorite Alternative Funds

Postby Avo » Sun Jul 16, 2017 12:40 am

grok87 wrote:I guess the question is (at least for me), is it better to invest in a Large Cap Value fund or a Large Cap "High Profitability/Low Investment" Fund (assuming you could find one).

I don't know the answer to this but I suspect that the latter might better avoid value traps.

Would be interested in what you and Robert think..

Robert T is far more of an expert than me.

I'm mostly all-in on the 3-fund protfolio these days, modulo some legacy holdings, and a modest stake in QSPNX that I bought in order to have access after the soft close, just in case I change my mind. I'm skeptical that the value premium will be accessible to retail investors at low enough cost going forward, and I'm especially skeptical of new-fangled factors, but who knows??

lack_ey
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Re: My Favorite Alternative Funds

Postby lack_ey » Sun Jul 16, 2017 1:42 am

If we have an idea that tall people are better at basketball on average (let's say it's statistically significant), but then some paper notes that height doesn't explain basketball performance much after you account for wingspan and running speed*, I think it would be highly misleading to say that we no longer believe in height as a variable that explains basketball performance. Regardless of what we've learned about wingspan or speed, if asked to form a basketball team with half of a class of students let's say, I think you'd rather sort by height than pick randomly. It's just that other approaches, some perhaps similar and correlated, could be better.

*I don't know the degree to which that is true; I'm just making up something plausible

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Robert T
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Re: My Favorite Alternative Funds

Postby Robert T » Sun Jul 16, 2017 4:16 am

grok87 wrote:Maybe to move onto something actionable...

I guess the question is (at least for me), is it better to invest in a Large Cap Value fund or a Large Cap "High Profitability/Low Investment" Fund (assuming you could find one).

I don't know the answer to this but I suspect that the latter might better avoid value traps.

Would be interested in what you and Robert think..

Here are the returns from Ken French’s dataset:

1964-2016: Annualized Return / Standard Deviation / Sharpe Ratio / Max One Year Loss (2008)

    12.3 / 18.7 / 0.50 /-38.8 = FF Large Cap Low Investment/High Profit
    12.1 / 19.2 / 0.48 / -39.3 = FF Large Cap Value
    ..9.8 / 17.4 / 0.38 / -36.7 = FF Market
A 0.2% higher return and 0.5 lower standard deviation …

A key difference between FF Large Cap Low Investment/High Profit and FF Large Cap Value is exposure to “High Profit”. Below are the “investment” and “profit” factor loads from 1964-2016. FF LV has higher exposure to low investment companies (0.65 vs. 0.55), and lower exposure to high gross profit companies (0.05 vs. 0.37).

P1 = FF Large Cap Low Investment/High Profit
P2 = FF Large Cap Value

    P1 / P2
    1.04 / 1.07 = Market
    -0.03 / 0.03 = Size
    0.37 / 0.05 = Profit
    0.55 / 0.65 = Investment
What impact would simply increasing exposure to high gross profit companies in a ‘value’ portfolio have on performance? This is what DFA did and the resulting effect in simulated historical performance was to increase annualized returns by 0.2 to 0.3% and to marginally lower the standard deviation (derived from the DFA Matrix books).

    1975-2012: Annualized return (%) / Standard Deviation

    DFA Core 2 without profitability 14.0 / 17.4
    DFA Core 2 with profitability 14.3 / 17.6

    DFA Vector without profitability 15.6 / 19.5
    DFA Vector with profitability 15.8 / 19.3

    DFA Targeted value without profitability 17.6 / 21.8
    DFA Targeted value with profitability 17.8 / 21.7
So with respect to your question – the FF Large Cap Low Investment/High Profit was marginally 'better' than FFLV (at least in simulated backtested data).

I would just note that some “value series” have higher exposure to ‘high profit’ companies than FF LV – notably the Dimensional Large Value series (with ‘profitability’ sorts), and the RAFI series (as reflected in simulated data from 1964).

I am conscious that this is a thread about "alternative funds", so perhaps getting a bit off track.

Robert
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Tramper Al
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Re: My Favorite Alternative Funds

Postby Tramper Al » Sun Jul 16, 2017 6:49 am

This is a very valuable thread topic, but I am surprised by a couple of key omissions.

1) Expenses. They matter in this universe too.

2) VMNFX. I saw just a couple of mentions in passing, but Vanguard's own low cost retail hedge fund did not make the top 5 summary list? Yes, at one point I bought the indicated minimum direct from Vanguard and then scaled back to my AA target amount the very next day. But I have since found I can buy as little as $50 worth in a new or additional position, at WellsTrade. But I almost never see it discussed here in any serious way.

grok87
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Re: My Favorite Alternative Funds

Postby grok87 » Sun Jul 16, 2017 8:41 am

Tramper Al wrote:This is a very valuable thread topic, but I am surprised by a couple of key omissions.

1) Expenses. They matter in this universe too.

2) VMNFX. I saw just a couple of mentions in passing, but Vanguard's own low cost retail hedge fund did not make the top 5 summary list? Yes, at one point I bought the indicated minimum direct from Vanguard and then scaled back to my AA target amount the very next day. But I have since found I can buy as little as $50 worth in a new or additional position, at WellsTrade. But I almost never see it discussed here in any serious way.

I own the fund VMNFX (vanguard market neutral) for 5-10% of my risk portfolio. Here are some of my thoughts:

1) I like the fact that expenses are low at 0.22%.

2) I like that it does not use extra leverage- more accurately it is levered at 2:1. For every $1 you give them they make $2 worth of bets, $1 long and $1 short. Compare that to AQR's market neutral fund QMNNX which uses extra leverage and is levered at 4:1.
http://portfolios.morningstar.com/fund/ ... ture=en-US
or even the AQR style premia QSPIX which is levered more like 7-8:1.

3) over the past year VMNFX has returned 1.74% vs. aqr's market neutral QMNNX at 7.08%. If we adjust QMNNX down for leverage it would be at 3.54%. So VMNFX has been a little weak on returns recently. I would expect it to return around tbills + 3% which would be around 3.5% for the past year I guess.
"...people always live for ever when there is any annuity to be paid them"- Jane Austen

grok87
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Re: My Favorite Alternative Funds

Postby grok87 » Sun Jul 16, 2017 8:44 am

Robert T wrote:
grok87 wrote:Maybe to move onto something actionable...

I guess the question is (at least for me), is it better to invest in a Large Cap Value fund or a Large Cap "High Profitability/Low Investment" Fund (assuming you could find one).

I don't know the answer to this but I suspect that the latter might better avoid value traps.

Would be interested in what you and Robert think..

Here are the returns from Ken French’s dataset:

1964-2016: Annualized Return / Standard Deviation / Sharpe Ratio / Max One Year Loss (2008)

    12.3 / 18.7 / 0.50 /-38.8 = FF Large Cap Low Investment/High Profit
    12.1 / 19.2 / 0.48 / -39.3 = FF Large Cap Value
    ..9.8 / 17.4 / 0.38 / -36.7 = FF Market
A 0.2% higher return and 0.5 lower standard deviation …

A key difference between FF Large Cap Low Investment/High Profit and FF Large Cap Value is exposure to “High Profit”. Below are the “investment” and “profit” factor loads from 1964-2016. FF LV has higher exposure to low investment companies (0.65 vs. 0.55), and lower exposure to high gross profit companies (0.05 vs. 0.37).

P1 = FF Large Cap Low Investment/High Profit
P2 = FF Large Cap Value

    P1 / P2
    1.04 / 1.07 = Market
    -0.03 / 0.03 = Size
    0.37 / 0.05 = Profit
    0.55 / 0.65 = Investment
What impact would simply increasing exposure to high gross profit companies in a ‘value’ portfolio have on performance? This is what DFA did and the resulting effect in simulated historical performance was to increase annualized returns by 0.2 to 0.3% and to marginally lower the standard deviation (derived from the DFA Matrix books).

    1975-2012: Annualized return (%) / Standard Deviation

    DFA Core 2 without profitability 14.0 / 17.4
    DFA Core 2 with profitability 14.3 / 17.6

    DFA Vector without profitability 15.6 / 19.5
    DFA Vector with profitability 15.8 / 19.3

    DFA Targeted value without profitability 17.6 / 21.8
    DFA Targeted value with profitability 17.8 / 21.7
So with respect to your question – the FF Large Cap Low Investment/High Profit was marginally 'better' than FFLV (at least in simulated backtested data).

I would just note that some “value series” have higher exposure to ‘high profit’ companies than FF LV – notably the Dimensional Large Value series (with ‘profitability’ sorts), and the RAFI series (as reflected in simulated data from 1964).

I am conscious that this is a thread about "alternative funds", so perhaps getting a bit off track.

Robert
.

Thanks Robert, very helpful statistics and analysis.
To bring it back to the thread topic, are you aware of any alternative funds focused on long short "profitability/investment". I'm aware that some of the AQR alternatives may use these factors but they don't seem focused on them. They seem more focused on momentum and value.
cheers,
grok
"...people always live for ever when there is any annuity to be paid them"- Jane Austen

grok87
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Re: My Favorite Alternative Funds

Postby grok87 » Sun Jul 16, 2017 8:44 am

Avo wrote:
grok87 wrote:I guess the question is (at least for me), is it better to invest in a Large Cap Value fund or a Large Cap "High Profitability/Low Investment" Fund (assuming you could find one).

I don't know the answer to this but I suspect that the latter might better avoid value traps.

Would be interested in what you and Robert think..

Robert T is far more of an expert than me.

I'm mostly all-in on the 3-fund protfolio these days, modulo some legacy holdings, and a modest stake in QSPNX that I bought in order to have access after the soft close, just in case I change my mind. I'm skeptical that the value premium will be accessible to retail investors at low enough cost going forward, and I'm especially skeptical of new-fangled factors, but who knows??

thanks Avo
"...people always live for ever when there is any annuity to be paid them"- Jane Austen

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nedsaid
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Re: My Favorite Alternative Funds

Postby nedsaid » Sun Jul 16, 2017 4:50 pm

packer16 wrote: I really did believe that value had excess return but am now coming to the realization than Bogle is probably correct & the growth/value difference is largely cyclical and with increasing efficiency over time the excess return we have seen in the past is just the market becoming more efficient, therefore, waiting for a value premium to show up is based on hope more than anything else.
Packer


Packer, you have been a frequent contributor to "value" threads and a member of the Benjamin Graham school of bottoms up value investing. As I recall, you value businesses for a living. Seeing you throw in the towel really says something to me. Pretty much, when the last optimist finally gives up, a bull market is sure to follow. When the last advocate of value gives up, a rally of value stocks is on its way. It reminds me of the "Death of Equities" cover on BusinessWeek magazine.

I keep saying that investors should be looking at plain old boring Large Cap Value. I think both High Dividend and Low Volatility are overgrazed at this point. I know there is overlap between Value, High Dividend, and Low Volatility. Large Value should be fine if you don't screen for High Dividend or low vol. Time will tell if I am correct.
A fool and his money are good for business.

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Re: My Favorite Alternative Funds

Postby whodidntante » Sun Jul 16, 2017 5:03 pm

nedsaid wrote:
I keep saying that investors should be looking at plain old boring Large Cap Value.



Agreed. As far as I know, value isn't dead in the US market. Though it's certainly been on the wrong end of the bat lately.

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packer16
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Re: My Favorite Alternative Funds

Postby packer16 » Sun Jul 16, 2017 6:55 pm

The value cycle may change if it is a secular trend. I just do not have confidence it will. I currently have value (cumulative SCV vs. S&P 500) ahead of growth since 1996 (just before the tech rally) at cumulative 14%, this is yearly difference of .63% per year. The question is will value rally & prove the secular trend followers correct or will stay the same or decline which would tip the scales to the cyclical folks (like Bogle). Bogle has seen much more than me over the years, so currently I am deferring to him versus my previous stance.

I still believe you can find value just not with a cross sectional approach that is easily reproducible by a computer. You can find it in not as diversified sets of securities that would have very small weights in a SCV fund.

Packer
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HomerJ
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Re: My Favorite Alternative Funds

Postby HomerJ » Sun Jul 16, 2017 8:01 pm

grap0013 wrote:You're not gonna lose your shirt on this one IMO.


You going to cover my losses, if I do?

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Re: My Favorite Alternative Funds

Postby LadyGeek » Sun Jul 16, 2017 8:56 pm

New member WildCat48 has a question which I've moved into a new thread: [Need help to review alternative investment portfolio]
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Robert T
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Re: My Favorite Alternative Funds

Postby Robert T » Sun Jul 16, 2017 9:00 pm

grok87 wrote:To bring it back to the thread topic, are you aware of any alternative funds focused on long short "profitability/investment". I'm aware that some of the AQR alternatives may use these factors but they don't seem focused on them. They seem more focused on momentum and value.
cheers,
grok

No. But would just note that HML already includes some exposure to 'high profit' (RMW) and a lot of exposure to 'low investment' (CMA) as per the 0.23 and 1.04 loadings respectively in the earlier linked article. AQR also focuses on quality (profitability), not just momentum and value.

packer16 wrote:I currently have value (cumulative SCV vs. S&P 500) ahead of growth since 1996 (just before the tech rally) at cumulative 14%, this is yearly difference of .63% per year

If making the comparison with the S&P series.

January 1996 to June 2017 (21.5 yrs): Annualized returns

    8.6% = S&P 500
    10.9% = S&P SmallCap 600 Value
    2.3% = Difference in annualized returns
Robert
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grok87
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Re: My Favorite Alternative Funds

Postby grok87 » Sun Jul 16, 2017 10:13 pm

Robert T wrote:
grok87 wrote:To bring it back to the thread topic, are you aware of any alternative funds focused on long short "profitability/investment". I'm aware that some of the AQR alternatives may use these factors but they don't seem focused on them. They seem more focused on momentum and value.
cheers,
grok

No. But would just note that HML already includes some exposure to 'high profit' (RMW) and a lot of exposure to 'low investment' (CMA) as per the 0.23 and 1.04 loadings respectively in the earlier linked article. AQR also focuses on quality (profitability), not just momentum and value.

thanks
"...people always live for ever when there is any annuity to be paid them"- Jane Austen

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grap0013
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Re: My Favorite Alternative Funds

Postby grap0013 » Mon Jul 17, 2017 7:08 am

nisiprius wrote:
grap0013 wrote:...Yep, Larry is getting into the land of 1/3 equities, 1/3 bonds, 1/3 Alts...
The Only Guide To Winning Investment Strategy You'll Ever Need: Index Funds and Beyond--The Way Smart Money Creates Wealth Today isn't all you ever need?

It's not good enough to stay the course in these model portfolios?

Image


That's an excellent point. It seems virtually every financial author has changed their recommendations at some point in their career. It can make one skeptical about the recommendations. Although finance is a very soft science I think this is analogous to medicine. Smart people change their mind when presented with new information as Larry says. I concur. Eg. MDs and other healthcare professionals that are practicing based on medical information in 1998 are not going to get the best outcomes and their patients will suffer for it. Same thing here. I believe in general there is always room for improvement. Bogle improved investing with the cap weighted index and it is erroneous in my opinion to assume we have reached the pinnacle of investment strategy knowledge. However, I do believe 99%+ of folks should probably just pick a target date fund.
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Re: My Favorite Alternative Funds

Postby QuietProsperity » Mon Jul 17, 2017 2:00 pm

grap0013 wrote:It seems virtually every financial author has changed their recommendations at some point in their career.


This is everything and applies to us as investors too.

I firmly believe that anyone that can hold onto a reasonable strategy (Market-Cap, Value, Momentum, Trend, Multi-Factor, etc.) will be more than fine over the long-term. Buffet's super power isn't in picking companies imo (Although he does seem to be really good at it), it is that he has stuck to his philosophy for a very long time and so he has reaped the rewards. This goes for any great investor, including Bogle. Find a reasonable philosophy and strategy, stick to it through thick and thin, and you will be more than fine relative to other investors.


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