My Favorite Alternative Funds

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grap0013
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Re: My Favorite Alternative Funds

Post by grap0013 » Sun Jul 09, 2017 9:43 pm

Top99% wrote:Thanks for laying these out in such a convenient table. We use QSPIX, LENDX and SRRIX for ~20 percent of our portfolio. The fees are very hard to swallow and something that I hope will come down with time but the diversification benefit suits us.
That's why I try to look at annualized returns net of fees. Comparing X2 TSM funds you want to pick the one that costs 0.2% vs. 1.2%. No brainer. If LENDX or SRRIX had lower cost investable competition I would have more to deliberate. However, these funds are kinda unicorns for now. They are living up to the bill though. From what I listed above, the average of the 3 Stone Ridge funds is 7.07% with 78% of the months positive. Equities have been only positive about 60% of months historically plus you had much wilder swings. Persistently positive mid to high single digit returns with low correlation to stocks and bonds makes the ER irrelevant. :sharebeer
There are no guarantees, only probabilities.

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grap0013
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Re: My Favorite Alternative Funds

Post by grap0013 » Sun Jul 09, 2017 9:49 pm

nisiprius wrote:
grap0013 wrote:Fund Example: LENDX
Purchase: Stone Ridge
Did you manage to buy this fund directly from Stone Ridge? If not, how did you manage it?
I'm still 15% QSPIX, 5% QMHIX for the record. I'm in the homework phase of these other funds. Plus moving money around may subject any backdoor Roths to pro rata rules for me so I'm still weighing my options.
There are no guarantees, only probabilities.

Random Walker
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Re: My Favorite Alternative Funds

Post by Random Walker » Sun Jul 09, 2017 10:32 pm

Hi Grok,
I don't have any primary data, just data summarized in Larry's writings. Most recently I've seen it in his Factor based Investing book and the above AQR paper. If I remember the size of the premium was large and t-stat was super strong. I think I remember that even Fama, the ultimate efficient markets proponent, threw in the towel and acknowledged Momentum.
TS Momentum will do well in both protracted up and down markets; thus the "smile curve" in the AQR paper. I would expect the reversals, like 2009, to be painful.

Dave

grok87
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Re: My Favorite Alternative Funds

Post by grok87 » Sun Jul 09, 2017 10:49 pm

Random Walker wrote:Hi Grok,
I don't have any primary data, just data summarized in Larry's writings. Most recently I've seen it in his Factor based Investing book and the above AQR paper. If I remember the size of the premium was large and t-stat was super strong. I think I remember that even Fama, the ultimate efficient markets proponent, threw in the towel and acknowledged Momentum.
TS Momentum will do well in both protracted up and down markets; thus the "smile curve" in the AQR paper. I would expect the reversals, like 2009, to be painful.

Dave
thanks Dave.

i guess i would be cautious about any analysis on momentum out of AQR. Tough to separate the true research from the marketing spin. As Buffet would say, don't ask the barber if you need a haircut.
Lot's of backtesting and clever period-selection stuff in their papers. For example they tend to start with 1990 and hence avoid the 1987 crash.

Fama i believe would say that momentum is totally risk-based- he believes that of all factors i think. he's associated obviously with DFA and they don't i think have any leveraged long-short momentum funds but merely use it as a screen as to when to trade.
"...people always live for ever when there is any annuity to be paid them"- Jane Austen

Random Walker
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Re: My Favorite Alternative Funds

Post by Random Walker » Sun Jul 09, 2017 11:37 pm

What sort of risk story could be behind Momentum though?

Dave

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whodidntante
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Re: My Favorite Alternative Funds

Post by whodidntante » Mon Jul 10, 2017 12:20 am

Random Walker wrote:What sort of risk story could be behind Momentum though?

Dave
I personally get nervous when my single stocks rise precipitously and I may make the behavioral mistake of "taking profits" even though intellectually I understand I am probably making an error. And judging from the number of posts on this forum indicating that "the market" is overvalued, people get nervous about broad indices rising also. Those who trade based on quantitative analysis of momentum may realize a premium compared to the guy (me) who "felt" he should sell.

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whodidntante
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Re: My Favorite Alternative Funds

Post by whodidntante » Mon Jul 10, 2017 12:22 am

grap0013 wrote:
whodidntante wrote:How did you determine hypothetical 2008 performance?
QSPIX - interview with AQR folks
QMHIX - TS MOM index was +20%, high volatility version implies 50% higher returns, but you know how that goes.
LENDX - Larry S. I was being conservative with -5%. Any estimate needs at least 5% error bars on either side of it though IMO. If not higher.
SRRIX - Last bad year was ~-15% in 2005 for this strategy per Larry
AVRPX - wild guess, would need to dig deeper
Thank you.

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whodidntante
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Re: My Favorite Alternative Funds

Post by whodidntante » Mon Jul 10, 2017 12:33 am

grap0013 wrote:
nedsaid wrote:Really what has fueled interest in these type of instruments is the desire for a good bond substitute. Wasn't too awful long ago that you could get 6% returns from bonds with minimal risk and minimal correlation to the stock market. Well, your bond yields are more like 2% to 3%, even a 30 year US Treasury Bond doesn't get you 3%. Heck, I remember the days of 8% US Treasury Zero Coupon Bonds. I remember I-Bonds and TIPS with real rates of 3% or more. The days of low-risk, decent returns from bonds are pretty much over. Today, they are low risk, low return.

Grap0013 wrote an excellent post and summarized some of the best Alternative Funds out there. Hopefully they can deliver the 7% returns and low stock market correlations. So far the returns from these funds are very acceptable. The managed futures fund has had negative performance but it is there for insurance against market extremes. So far so good. I will read this thread with great interest.
+1. I'm still 15+ years from retirement. I don't need bonds for warm fuzzies. I can't swallow a 2% yield dragging my returns down. However, 6-8% is another story. Even if equities return 10% the next 15 years these ALTs are a great addition. I could see a final retirement allocation of 1/3 stocks, 1/3 bonds, and 1/3 ALTs being very attractive.
I am also 15+ years away from retirement and I have similar thoughts about the current low yielding bonds. I held my nose and bought an intermediate term bond fund and a stable value fund in my 401k once I decided to eliminate cash and fixed income from my taxable accounts, but I still don't have nearly the fixed income allocation that some here talk about. I would be incredibly happy to have my alternative investments return 5%+ per year and I bought them with the expectation that they would, though I do not depend on that outcome.

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Re: My Favorite Alternative Funds

Post by Avo » Mon Jul 10, 2017 1:13 am

Well I'm pretty disappointed with QSPNX, which has been flat for the past 1.5 years:

Image

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Re: My Favorite Alternative Funds

Post by gtwhitegold » Mon Jul 10, 2017 4:43 am

The 00s were net neutral for US stocks. You must have hated it then.

No asset will ever perform consistently except for CDs, US Government Bonds held to maturity, and savings accounts. If you expect anything to, you're probably fooling yourself.
Avo wrote:Well I'm pretty disappointed with QSPNX, which has been flat for the past 1.5 years:

Image

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matjen
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Re: My Favorite Alternative Funds

Post by matjen » Mon Jul 10, 2017 6:24 am

grok87 wrote: thanks Dave.

i guess i would be cautious about any analysis on momentum out of AQR. Tough to separate the true research from the marketing spin. As Buffet would say, don't ask the barber if you need a haircut.
Lot's of backtesting and clever period-selection stuff in their papers. For example they tend to start with 1990 and hence avoid the 1987 crash.

Fama i believe would say that momentum is totally risk-based- he believes that of all factors i think. he's associated obviously with DFA and they don't i think have any leveraged long-short momentum funds but merely use it as a screen as to when to trade.
Really Grok?!? I just quickly looked up the two AQR papers that I remembered off the top of my head. A) Prestigious journals and B) They share their ongoing data set.

Value and Momentum Everywhere
Journal of Finance
https://eorder.sheridan.com/3_0/app/ord ... e-929.html
https://www.aqr.com/library/data-sets/v ... rs-monthly
We examine value and momentum portfolios of individual stocks globally across four equity markets: the United States, the United Kingdom, continental Europe, and Japan. The U.S. stock universe consists of all common equity in CRSP (sharecodes 10 and 11) with a book value from Compustat in the previous 6 months, and at least 12 months of past return history from January 1972 to July 2011.
Fact, Fiction and Momentum Investing
https://www.aqr.com/library/journal-art ... -investing
The existence of momentum is a well-established empirical fact. The return premium is evident in 212 years of U.S. equity data (from 1801 to 2012) — as well as U.K. equity data dating back to the Victorian age in over 20 years of out-of-sample evidence from its original discovery, in 40 other countries and in more than a dozen other asset classes. Some of this evidence predates academic research in financial economics, suggesting that the momentum premium has been a part of markets for as long as there have been markets.
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grok87
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Re: My Favorite Alternative Funds

Post by grok87 » Mon Jul 10, 2017 7:24 am

Random Walker wrote:What sort of risk story could be behind Momentum though?

Dave
I sometimes get confused about what is a risk story and what is a behavioral story. Let me take a stab at it, starting with small-value stocks, in the way i think Fama might say it.

"The Small- value premium has a positive expected return because investors run the risk that, due to depression/deflation or perhaps for no clear reason, it will be materially negative (on a trailing CAGR basis) for long periods of time, say 5-10 years or more. (Cf great depression and tech bubble)

Now onto momentum

"The Momentum premium has a positive expected return because investors run the risk that, due to a rapid change in economic or policy conditions, or perhaps for no clear reason, it will be materially negative (on a trailing CAGR basis) for long periods of time, say 5-10 years or more. (Cf the 2007-2016 period with quantitative easing in 2009 and unexpected presidential election in 2016 As possible reasons for the realiZed outcomes of -83% and -20% for those years respectively leading to a cumulative -72% loss for this 10 year period)"
"...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

Post by grok87 » Mon Jul 10, 2017 7:25 am

matjen wrote:
grok87 wrote: thanks Dave.

i guess i would be cautious about any analysis on momentum out of AQR. Tough to separate the true research from the marketing spin. As Buffet would say, don't ask the barber if you need a haircut.
Lot's of backtesting and clever period-selection stuff in their papers. For example they tend to start with 1990 and hence avoid the 1987 crash.

Fama i believe would say that momentum is totally risk-based- he believes that of all factors i think. he's associated obviously with DFA and they don't i think have any leveraged long-short momentum funds but merely use it as a screen as to when to trade.
Really Grok?!? I just quickly looked up the two AQR papers that I remembered off the top of my head. A) Prestigious journals and B) They share their ongoing data set.

Value and Momentum Everywhere
Journal of Finance
https://eorder.sheridan.com/3_0/app/ord ... e-929.html
https://www.aqr.com/library/data-sets/v ... rs-monthly
We examine value and momentum portfolios of individual stocks globally across four equity markets: the United States, the United Kingdom, continental Europe, and Japan. The U.S. stock universe consists of all common equity in CRSP (sharecodes 10 and 11) with a book value from Compustat in the previous 6 months, and at least 12 months of past return history from January 1972 to July 2011.
Fact, Fiction and Momentum Investing
https://www.aqr.com/library/journal-art ... -investing
The existence of momentum is a well-established empirical fact. The return premium is evident in 212 years of U.S. equity data (from 1801 to 2012) — as well as U.K. equity data dating back to the Victorian age in over 20 years of out-of-sample evidence from its original discovery, in 40 other countries and in more than a dozen other asset classes. Some of this evidence predates academic research in financial economics, suggesting that the momentum premium has been a part of markets for as long as there have been markets.
Thanks Matjen,
I'll read the papers
Grok
"...people always live for ever when there is any annuity to be paid them"- Jane Austen

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Re: My Favorite Alternative Funds

Post by Robert T » Mon Jul 10, 2017 8:20 am

.
On momentum:

Long/short: the -82.91% return in 2009 was driven by loses on the short side - so would be hesitant of long/short momentum due to negative skewness.

Long only (large caps): the largest one year loss 1927-2016 = -36.74% (according to FF data).

1926-2016: Annualized return (%)/SD/Sharpe Ratio

13.4 / 23.0 / 0.53 = FF Large Cap Momentum
12.0 / 26.8 / 0.44 = FF Large Cap Value
.9.8 / 20.2 / 0.41 = FF Market

FWIW - here are some live return comparisons of iShares MSCI USA Momentum (MTUM), with Vanguard Growth (VUG) - as it is often compared with this fund, and Vanguard 500 (VFINX). https://www.portfoliovisualizer.com/bac ... ion3_3=100

Obviously no guarantees.

Robert
.

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grap0013
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Re: My Favorite Alternative Funds

Post by grap0013 » Mon Jul 10, 2017 8:34 am

Avo wrote:Well I'm pretty disappointed with QSPNX, which has been flat for the past 1.5 years:

Image
That's a short time frame. Patience. Equity premium can be negative for significantly long times, you have to expect the same could happen here. Although with the 4 factors I think it's less likely than equity to be flat for a significantly long time eg 5-10 years. Stop looking at it for a while. EM was down/flat for quite some time and know I'm getting rewarded for my discipline.
There are no guarantees, only probabilities.

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grap0013
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Re: My Favorite Alternative Funds

Post by grap0013 » Mon Jul 10, 2017 8:40 am

Random Walker wrote:What sort of risk story could be behind Momentum though?

Dave
I wish there was a risk story then it'd be easier to swallow. The data is what it is however. It is as robust as value and small IMO. I cannot ignore it and have to put some :moneybag :moneybag there.

I should see if I can find the monthly returns of that TS MOM index back in 2008 and 2009 (they are on my home PC). You could actually feel the momentum at the time and also visualize it in the data.
There are no guarantees, only probabilities.

Random Walker
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Re: My Favorite Alternative Funds

Post by Random Walker » Mon Jul 10, 2017 8:40 am

I'm not really buying any of the risk based argument for Momentum. Any strategy can do badly, so saying "the risk is it might do badly when markets turn" I don't think is a real underlying risk to the individual assets. I think trend following is simply that, the behavior of following trends. The asymmetries involved in arbitraging away the premium I believe are very important for the persistence of the premium.

Dave

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Re: My Favorite Alternative Funds

Post by Valuethinker » Mon Jul 10, 2017 10:53 am

BuyAndHoldOn wrote:Interesting that no one has discussed private equity. Is that too difficult to access for a non-accredited investor?

I like the concept of private equity more than trading strategies for an investment approach (i.e., some actual economic activity). Not "dissing" the other approaches, I find what hedge funds/alternative funds do to be fascinating.
There are some quoted vehicles in the US now, Blackstone, Apollo, KKR I believe, among others.

There are Private Equity Investment Trusts listed on the London Stock Exchange. However I suspect PFIC rules might kill you on those?

grok87
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Re: My Favorite Alternative Funds

Post by grok87 » Mon Jul 10, 2017 10:14 pm

grok87 wrote:
matjen wrote:
grok87 wrote: thanks Dave.

i guess i would be cautious about any analysis on momentum out of AQR. Tough to separate the true research from the marketing spin. As Buffet would say, don't ask the barber if you need a haircut.
Lot's of backtesting and clever period-selection stuff in their papers. For example they tend to start with 1990 and hence avoid the 1987 crash.

Fama i believe would say that momentum is totally risk-based- he believes that of all factors i think. he's associated obviously with DFA and they don't i think have any leveraged long-short momentum funds but merely use it as a screen as to when to trade.
Really Grok?!? I just quickly looked up the two AQR papers that I remembered off the top of my head. A) Prestigious journals and B) They share their ongoing data set.

Value and Momentum Everywhere
Journal of Finance
https://eorder.sheridan.com/3_0/app/ord ... e-929.html
https://www.aqr.com/library/data-sets/v ... rs-monthly
We examine value and momentum portfolios of individual stocks globally across four equity markets: the United States, the United Kingdom, continental Europe, and Japan. The U.S. stock universe consists of all common equity in CRSP (sharecodes 10 and 11) with a book value from Compustat in the previous 6 months, and at least 12 months of past return history from January 1972 to July 2011.
Fact, Fiction and Momentum Investing
https://www.aqr.com/library/journal-art ... -investing
The existence of momentum is a well-established empirical fact. The return premium is evident in 212 years of U.S. equity data (from 1801 to 2012) — as well as U.K. equity data dating back to the Victorian age in over 20 years of out-of-sample evidence from its original discovery, in 40 other countries and in more than a dozen other asset classes. Some of this evidence predates academic research in financial economics, suggesting that the momentum premium has been a part of markets for as long as there have been markets.
Thanks Matjen,
I'll read the papers
Grok
so i thought the second paper was interesting as it dealt with the french data set. the exhibit 1 returns tie to the momentum data i posted above (french's data).

so what's the problem?

the 6.3% return for momentum for 1991-2013 is an arithmetic average not a CAGR. if you do a CAGR for that period you get 0.9%!
i'm sure i don't need to point out the problem with arithmetic averages to most of the regulars on this thread, but for any others reading, one really needs to do CAGRs (or geometric averages). For example if you have a -50% one year, then a +50% return the next year does not get you back to even or 0% even though the arithmetic average of -50% and +50% is 0%. you need a 100% return to get back to zero which is what the geometric average would tell you (since ((1+-50%)*(1+100%))^0.5 = (1+0%)

i also didn't care for their starting their "recent" period with 1991. that looks pretty cherry picked to me (23 year period) and i didn't find their "out of sample" explanation convincing.

Updating to use data through 2016 (the most recent annual data on French's website)

ten year........... 1997-2016: CAGR = -12%
twenty year.......1987-2016: CAGR = -2.2%
thirty year.........1977-2016: CAGR = +1.7%
forty year..........1967-2016: CAGR = 4.5%

I don't find the 1.7% appealing- would probably get eaten up in transaction costs. So I guess, as long as you are willing to wait 40 years, yeah momentum should deliver!

I'm a little more susceptible to Asness's value+momentum combo argument. But again, investing is not physics. The correlations are not stable. certainly not stable enough to make a leveraged bet on it like QSPIX does- the idea of making a leveraged bet on something that (unleveraged) can lose 82% in a year is insane IMHO.
"...people always live for ever when there is any annuity to be paid them"- Jane Austen

Random Walker
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Re: My Favorite Alternative Funds

Post by Random Walker » Mon Jul 10, 2017 11:14 pm

Grok,
I believe you are making a mistake. I agree strongly that for a portfolio what matters is the CAGR. Nobody believes this more than me! See my post on volatility drag. But in evaluating an individual investment as a potential addition to a portfolio, I think the investor is best served looking at the simple average return, volatility, and correlations to other portfolio components. How the investment affects the portfolio CAGR I believe matters way more than the individual asset's CAGR in isolation. For example, many of us are interested in the positive portfolio effect of TS Mom in an extended equity bear.

Dave

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grap0013
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Re: My Favorite Alternative Funds

Post by grap0013 » Tue Jul 11, 2017 7:17 am

grok87 wrote: The correlations are not stable. certainly not stable enough to make a leveraged bet on it like QSPIX does- the idea of making a leveraged bet on something that (unleveraged) can lose 82% in a year is insane IMHO.
QSPIX is about 1/3 CS MOM and it is scaled for volatility and it has MOM outside of equities. You're not gonna lose your shirt on this one IMO. That's ok if you don't like the fund though.
There are no guarantees, only probabilities.

grok87
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Re: My Favorite Alternative Funds

Post by grok87 » Tue Jul 11, 2017 7:46 pm

Random Walker wrote:Grok,
I believe you are making a mistake. I agree strongly that for a portfolio what matters is the CAGR. Nobody believes this more than me! See my post on volatility drag. But in evaluating an individual investment as a potential addition to a portfolio, I think the investor is best served looking at the simple average return, volatility, and correlations to other portfolio components. How the investment affects the portfolio CAGR I believe matters way more than the individual asset's CAGR in isolation. For example, many of us are interested in the positive portfolio effect of TS Mom in an extended equity bear.

Dave
Dave,
Good luck with your investing strategy. Hopefully we won't have an extended equity bear market but I guess if we do we can see how it all works out.
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

Post by grok87 » Tue Jul 11, 2017 8:21 pm

grap0013 wrote:
grok87 wrote: The correlations are not stable. certainly not stable enough to make a leveraged bet on it like QSPIX does- the idea of making a leveraged bet on something that (unleveraged) can lose 82% in a year is insane IMHO.
QSPIX is about 1/3 CS MOM and it is scaled for volatility and it has MOM outside of equities. You're not gonna lose your shirt on this one IMO. That's ok if you don't like the fund though.
thanks grap,

So i'm sure you are familiar with the fact sheet right?
https://funds.aqr.com/our-funds/alterna ... ative-fund

so for every $1 you give them, they make $7.40 worth of bets
I'll take you at your word that 1/3 of the bets are momentum
so 1/3 of $7.40 or say $2.50 of your $1 at risk from momentum bets

now the french data is long/short so $2 at risk for every $1 stake
and as i posted above, long/short momentum for US stocks in 2009 lost 82% of the $1 or 82 cents.

so for $2.50 of bets that would mean a loss of 2.50/2.00*$0.82 or $1.025 i.e. your whole dollar is gone

now as you point out, not all the bets are equity bets, that could help but its not clear, in a crisis correlations or risk assets tend to go to 1.

as far as the volatility targeting, it's not clear that that would help either, we'll see I guess. it reminds me of portfolio insurance which in the 1987 crash did not help and some people think actually accelerated the crash.
https://en.wikipedia.org/wiki/Portfolio_insurance

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

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Re: My Favorite Alternative Funds

Post by pauliec84 » Wed Jul 12, 2017 11:34 am

Hi Grap,

[As Always] I really enjoyed this thread you started and your insights on the different alternative funds.
A few thoughts:

1) I can't help to draw the analogy to the complexity pension/endowment/SWF funds have layered on in an effort to produce superior risk adjusted returns than the classic stock-bond balanced portfolio. The results didn't turn out well.

2) Just because an asset has low correlation to stocks and positive expected return, does not mean that it the addition of the asset will improve the Sharpe ratio of the portfolio. For example, if the asset has high volatility, returns which are not sufficiently large, or is highly correlated with other non-equity assets in your portfolio, the inclusion of it could have a negative effect.

3) For illustrative (if not actionable) purpose, it would be interesting to see some mean-variance optimization using these various assets (as well as the main stream stock, bonds and commodities). You'd need the monthly (or better yet daily) returns of your example funds over a decent history, and then you could use your expectations of future returns (rather than the historical returns). The correlation matrix (rather than just the correlation with equities) would give a better sense of what assets deserve a place in a well balanced already-tilted portfolio (like mine :) ).

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Re: My Favorite Alternative Funds

Post by lack_ey » Wed Jul 12, 2017 11:54 am

grok87 wrote:
grap0013 wrote:
grok87 wrote: The correlations are not stable. certainly not stable enough to make a leveraged bet on it like QSPIX does- the idea of making a leveraged bet on something that (unleveraged) can lose 82% in a year is insane IMHO.
QSPIX is about 1/3 CS MOM and it is scaled for volatility and it has MOM outside of equities. You're not gonna lose your shirt on this one IMO. That's ok if you don't like the fund though.
thanks grap,

So i'm sure you are familiar with the fact sheet right?
https://funds.aqr.com/our-funds/alterna ... ative-fund

so for every $1 you give them, they make $7.40 worth of bets
I'll take you at your word that 1/3 of the bets are momentum
so 1/3 of $7.40 or say $2.50 of your $1 at risk from momentum bets

now the french data is long/short so $2 at risk for every $1 stake
and as i posted above, long/short momentum for US stocks in 2009 lost 82% of the $1 or 82 cents.

so for $2.50 of bets that would mean a loss of 2.50/2.00*$0.82 or $1.025 i.e. your whole dollar is gone

now as you point out, not all the bets are equity bets, that could help but its not clear, in a crisis correlations or risk assets tend to go to 1.

as far as the volatility targeting, it's not clear that that would help either, we'll see I guess. it reminds me of portfolio insurance which in the 1987 crash did not help and some people think actually accelerated the crash.
https://en.wikipedia.org/wiki/Portfolio_insurance

cheers,
grok
Even without volatility scaling, the position sizes (leverage scaling) still need to be rebalanced/adjusted over time, so generally you should see smaller losses and gains in practice than the raw factor numbers.

The past many decades of returns show correlation between factors as they've defined in different asset classes, but it's not near 1 and you probably shouldn't expect there to be.

Usually the vol scaling should help unless there's some kind of flash crash. Not always, but it's a safety valve, one that could be circumvented if necessary but probably a net positive. It's also possible that value saves the day if momentum is doing that badly; if momentum says to short downtrodden value stocks, the net exposure in the portfolio is not going to be heavily short those stocks to the point of getting slaughtered in a rebound. It's not a guarantee either but at least somewhat likely to help.

Then consider that 2008-2009 type events are relatively rare. We could see worse, or perhaps a crisis with different characteristics if not necessarily higher severity, with different effects. That's okay, and any given fund may hold up less well in those circumstances.

There's plenty of risk but the probable downside is not nearly as large as you always seem to imply.

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grap0013
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Re: My Favorite Alternative Funds

Post by grap0013 » Wed Jul 12, 2017 2:59 pm

pauliec84 wrote:Hi Grap,

[As Always] I really enjoyed this thread you started and your insights on the different alternative funds.
A few thoughts:

1) I can't help to draw the analogy to the complexity pension/endowment/SWF funds have layered on in an effort to produce superior risk adjusted returns than the classic stock-bond balanced portfolio. The results didn't turn out well.

2) Just because an asset has low correlation to stocks and positive expected return, does not mean that it the addition of the asset will improve the Sharpe ratio of the portfolio. For example, if the asset has high volatility, returns which are not sufficiently large, or is highly correlated with other non-equity assets in your portfolio, the inclusion of it could have a negative effect.

3) For illustrative (if not actionable) purpose, it would be interesting to see some mean-variance optimization using these various assets (as well as the main stream stock, bonds and commodities). You'd need the monthly (or better yet daily) returns of your example funds over a decent history, and then you could use your expectations of future returns (rather than the historical returns). The correlation matrix (rather than just the correlation with equities) would give a better sense of what assets deserve a place in a well balanced already-tilted portfolio (like mine :) ).
2) I have a spreadsheet I made with all of these funds and their monthly returns. I was going to calculate Sharpe Ratios but I got lazy and recognized it was not worth my time. I can literally see the benefits of LENDX and SRRIX. Follow their prices daily. Low daily volatility and pretty darn consistent returns. LENDX is already up again month-to-date another 0.2%. It's just churning along. I could calculate the Sharpe ratio but the actual number would not influence my decision making. If there is a little increased correlation with equities during a crisis that's fine with me.

3) I'd love to run some tests with Portfoliovisualizer but they do not include dividends in the returns of these funds.
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Re: My Favorite Alternative Funds

Post by grap0013 » Wed Jul 12, 2017 3:01 pm

Final point, maybe I'm a little overly influenced on these funds by one expert former poster? Maybe. If I can understand the concepts of these funds and he tells me he's done due diligence I don't need to backtest for example SRRIX in 2008 or maybe try to find the last 150 years of reinsurance returns. He's already done the work. I'll take his word for it. I've never caught him lying. It's no different that taking the recommendation from a brain surgeon when you need brain surgery. Will I go read a book on brain surgery beforehand? Nope. Do I understand every minor detail in all of these strategies? No. Do I need to? I don't think so. These funds will be fun to follow.
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Re: My Favorite Alternative Funds

Post by nedsaid » Wed Jul 12, 2017 3:28 pm

grap0013 wrote:Final point, maybe I'm a little overly influenced on these funds by one expert former poster? Maybe. If I can understand the concepts of these funds and he tells me he's done due diligence I don't need to backtest for example SRRIX in 2008 or maybe try to find the last 150 years of reinsurance returns. He's already done the work. I'll take his word for it. I've never caught him lying. It's no different that taking the recommendation from a brain surgeon when you need brain surgery. Will I go read a book on brain surgery beforehand? Nope. Do I understand every minor detail in all of these strategies? No. Do I need to? I don't think so. These funds will be fun to follow.
I believe Larry to be an honorable man and that he sincerely believes in and recommends these funds. My understanding is that he has invested in these himself, please correct me if I am wrong. In reading his posts, he has eaten his own cooking. In other words, he has invested his own money in accordance to what he recommends to others. This says a lot.

Again, these type of alternative funds are a proxy for what bonds used to be, a good rate of return with much less risk and low correlation to the stock market. Unfortunately bond yields are now more like two percent rather than six and thus the search for alternatives.
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Re: My Favorite Alternative Funds

Post by zaboomafoozarg » Wed Jul 12, 2017 3:55 pm

grap0013 wrote:Final point, maybe I'm a little overly influenced on these funds by one expert former poster? Maybe. If I can understand the concepts of these funds and he tells me he's done due diligence I don't need to backtest for example SRRIX in 2008 or maybe try to find the last 150 years of reinsurance returns.
True, but these are relatively recent suggestions and advice from him. Reading his books from the mid-2000's, he tended to be mostly in favor of SCV, REITs and commodity futures. But it is possible that was just because these newer investment vehicles focusing on pure factors were not available, and had they been available he would have recommended them.

Also speaking of CCFs, they have had a serious prolonged downturn with many Bogleheads posting about getting out of them over the past 5-10 years. PCRIX and DCMSX were a couple I saw him mention a few times, and they are both down about 50% from where they were 10 years ago.
grap0013 wrote:These funds will be fun to follow.
Agreed! I still have my 5% in QSPIX, and might put 5% in another alternative at some point.
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Re: My Favorite Alternative Funds

Post by matjen » Wed Jul 12, 2017 3:55 pm

Nedsaid,

It is my understanding that Larry has pretty much devoted his entire tax sheltered space to LENDX. SRRIX and QSPIX (and this other Stone Ridge Fund Grap mentioned). He is a HNW individual though so that is probably 10-15% of his portfolio is my guess. I recently read Roger Lowenstein's book on LTCM "When Genius Failed." When those guys were flush with cash and their margins were shrinking they were looking to try and diversify out of the bond and equity markets. They actually started a reinsurance company just as the wheels fell off. So similar reasoning to adding SRRIX to a portfolio.

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Re: My Favorite Alternative Funds

Post by willthrill81 » Wed Jul 12, 2017 3:58 pm

grap0013 wrote:
Jack FFR1846 wrote:I'd be careful with Lending Club. I own notes there and have kept up with the goings on in business there and trends with their lending. There's a big outflow from lenders (including me) and lots of former proponents have soured (and shown their monthly profits which have turned into monthly losses). My opinion is that they're going down the toilet. Don't just look at numbers and notice that they're depressed.
LENDX looks very broad and to have a lot of capacity IMO. The only geographical location they exclude is emerging markets. Me thinks the profits may have dried up some for the DIY borrower and gone to these larger outfits? Hence, you pay Stone Ridge to get your 7% return and they work hard for it.
I have seen my returns drop somewhat over the last year with Lending Club (I invest in notes directly and am very choosy about which ones I select; I'd say that fewer than 1% of all LC notes fit my carefully researched criteria), but I've still averaged over 9.5%. I actually rolled over a small IRA balance last year to LC mainly in order to diversify my portfolio with more than just equities. That being said, I probably won't ever put more than 5% of my total invested assets into it, mainly due to the risks associated with LC as a company. I think it's a bit like buying an individual stock.

There are two pieces of advice I would offer someone investing directly in LC. First, do not do it with a taxable account. I started at LC with a small taxable account that I still have, and it's a real pain from a tax perspective. I do my taxes manually, and it takes me a good hour just to get everything filed correctly just for that small LC account. Tax advantaged accounts are really the only way to go, IMHO.

Second, do not invest in all notes of any specific grade. You can dramatically improve your returns (I'm in the top 1% of lenders in terms of rate-of-return) by researching which criteria lead to the best returns. I won't give away everything, but E and F grade notes are where you can really make money, but it's only a small subset of these notes that I actually buy.
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Re: My Favorite Alternative Funds

Post by nedsaid » Wed Jul 12, 2017 4:03 pm

Matjen, what happened to that reinsurance fund that the Long Term Capital Management folks started? Did they have to abandon it when LTCM failed?
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Re: My Favorite Alternative Funds

Post by matjen » Wed Jul 12, 2017 4:13 pm

nedsaid wrote:Matjen, what happened to that reinsurance fund that the Long Term Capital Management folks started? Did they have to abandon it when LTCM failed?
I wondered the same thing and couldn't find anything on it. I'm going to assume they lost it. What many don't realize is that LTCM gave almost all the money back and tidy profits to their original investors with a few exceptions. The investors were pissed. All the partners in LTCM lost their shirts.
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Re: My Favorite Alternative Funds

Post by grok87 » Wed Jul 12, 2017 5:17 pm

lack_ey wrote:
There's plenty of risk but the probable downside is not nearly as large as you always seem to imply.
Thanks lack_ey.

There is actually one risk i forgot to mention. The fund is actively managed.

...
https://www.sec.gov/Archives/edgar/data ... 1d497k.htm

"The Fund is actively managed and the Fund’s exposures to Styles and Asset Groups will vary based on the Adviser’s evaluation of investment opportunities."

Active management is one thing for a regular mutual fund. But this one is 7.5x levered. Lot less room for error...

Cheers,
Grok
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Re: My Favorite Alternative Funds

Post by nedsaid » Wed Jul 12, 2017 11:50 pm

A silly question. We have talked about leverage here which to me means using borrowed money. What interest rate is a company like AQR paying?
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Re: My Favorite Alternative Funds

Post by lack_ey » Thu Jul 13, 2017 3:10 am

grok87 wrote:
lack_ey wrote:
There's plenty of risk but the probable downside is not nearly as large as you always seem to imply.
Thanks lack_ey.

There is actually one risk i forgot to mention. The fund is actively managed.

...
https://www.sec.gov/Archives/edgar/data ... 1d497k.htm

"The Fund is actively managed and the Fund’s exposures to Styles and Asset Groups will vary based on the Adviser’s evaluation of investment opportunities."

Active management is one thing for a regular mutual fund. But this one is 7.5x levered. Lot less room for error...

Cheers,
Grok
Hm, I'd have to disagree here.

I think it would make less sense for something like this to be passively managed in the sense of strictly following an index. The fund's investment strategy and positions are algorithmically determined in the quant sense, so there's not manager risk in the sense of somebody making a call on a certain security and betting big on one directional swing with a lot of leverage. It's supposed to be non-discretionary generally. Leverage ratios are determined by past vol and signal agreement/disagreeement.

The fund filings are written more broadly than the fund is actually run in day-to-day operations, at least according to the information available, like what Larry has said based on his past meetings.

There's just some leeway to pull the plug, manage crisis situations, etc., rather than sticking exactly to what the predetermined algorithm (or index) says. Not that I'd particularly trust them to do a great job there, but I'd rather have a manager looking perhaps to adapt the risk management and leverage if things got to that point—even if you call that active management—than somebody trying to follow an index into a ditch.

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Re: My Favorite Alternative Funds

Post by grok87 » Thu Jul 13, 2017 7:33 am

lack_ey wrote:
grok87 wrote:
lack_ey wrote:
There's plenty of risk but the probable downside is not nearly as large as you always seem to imply.
Thanks lack_ey.

There is actually one risk i forgot to mention. The fund is actively managed.

...
https://www.sec.gov/Archives/edgar/data ... 1d497k.htm

"The Fund is actively managed and the Fund’s exposures to Styles and Asset Groups will vary based on the Adviser’s evaluation of investment opportunities."

Active management is one thing for a regular mutual fund. But this one is 7.5x levered. Lot less room for error...

Cheers,
Grok
Hm, I'd have to disagree here.

I think it would make less sense for something like this to be passively managed in the sense of strictly following an index. The fund's investment strategy and positions are algorithmically determined in the quant sense, so there's not manager risk in the sense of somebody making a call on a certain security and betting big on one directional swing with a lot of leverage. It's supposed to be non-discretionary generally. Leverage ratios are determined by past vol and signal agreement/disagreeement.

The fund filings are written more broadly than the fund is actually run in day-to-day operations, at least according to the information available, like what Larry has said based on his past meetings.

There's just some leeway to pull the plug, manage crisis situations, etc., rather than sticking exactly to what the predetermined algorithm (or index) says. Not that I'd particularly trust them to do a great job there, but I'd rather have a manager looking perhaps to adapt the risk management and leverage if things got to that point—even if you call that active management—than somebody trying to follow an index into a ditch.
Thanks lack_ey.
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Re: My Favorite Alternative Funds

Post by Lieutenant.Columbo » Thu Jul 13, 2017 8:04 pm

grap0013 wrote:...One could do (of total portfolio):

5% LENDX
5% SRRIX
5% QSPIX
5% AVRPX
5% QMHIX

Or even:

9% LENDX
9% SRRIX
5% QSPIX
5% AVRPX
5% QMHIX

The latter allocation gives more weighting to LENDX and SRRIX due to more persistent positive returns and return per unit of risk ie risk/reward trade off looks more favorable for these funds than the other three....
somewhere else sometime earlier this year, and speaking of LENDX and SRRIX,
larryswedroe wrote:The two funds have about same expected return but the volatility of LENDX is only about 5 (vs 20 for equities) and for SRRIX it’s only about 10. So with about same expected return currently and about half the risk in terms of volatility I have 2x in LENDX that I do in SRRIX.
EDIT: Also, just now
larryswedroe wrote:...we have approved and I will be personally investing significant dollars, in SRs All Asset Variance Risk Premium fund with similar expect ed returns and risk (SD) to SRRIX. All have low correlation to stocks and bonds, and if take from stocks will significantly reduce tail risks. If take from bonds will significantly add to returns without adding pro rata to vol. either way more efficient portfolios. For clients with capacity will be considering allocations as high as say 25% to these plus QSPRX
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Re: My Favorite Alternative Funds

Post by tarheel » Fri Jul 14, 2017 6:28 am

Been traveling so just catching up with this great thread now. Thanks grap! Nice to have a discussion on alternatives without the normal "don't ever buy these are you crazy" comments.

70% tilted equities/15% bonds/7.5% QSPIX/7.5% QMHIX for life. :beer

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Re: My Favorite Alternative Funds

Post by topper1296 » Fri Jul 14, 2017 7:30 am

I like the idea of alternative funds and was once invested in a merger arbitrage fund, however I dumped it because the expenses were over 1%. I would consider back into an alternative funds if the costs are reasonable.

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Re: My Favorite Alternative Funds

Post by grap0013 » Fri Jul 14, 2017 12:42 pm

Lieutenant.Columbo wrote:
grap0013 wrote:The latter allocation gives more weighting to LENDX and SRRIX due to more persistent positive returns and return per unit of risk ie risk/reward trade off looks more favorable for these funds than the other three....
somewhere else sometime earlier this year, and speaking of LENDX and SRRIX,
larryswedroe wrote:The two funds have about same expected return but the volatility of LENDX is only about 5 (vs 20 for equities) and for SRRIX it’s only about 10. So with about same expected return currently and about half the risk in terms of volatility I have 2x in LENDX that I do in SRRIX.
EDIT: Also, just now
larryswedroe wrote:...we have approved and I will be personally investing significant dollars, in SRs All Asset Variance Risk Premium fund with similar expect ed returns and risk (SD) to SRRIX. All have low correlation to stocks and bonds, and if take from stocks will significantly reduce tail risks. If take from bonds will significantly add to returns without adding pro rata to vol. either way more efficient portfolios. For clients with capacity will be considering allocations as high as say 25% to these plus QSPRX
Yep, Larry is getting into the land of 1/3 equities, 1/3 bonds, 1/3 Alts. It definitely has its virtues.

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Re: My Favorite Alternative Funds

Post by grap0013 » Fri Jul 14, 2017 12:43 pm

tarheel wrote:Been traveling so just catching up with this great thread now. Thanks grap! Nice to have a discussion on alternatives without the normal "don't ever buy these are you crazy" comments.

70% tilted equities/15% bonds/7.5% QSPIX/7.5% QMHIX for life. :beer
How you liking QMHIX? I dislike it so far and that's why I know it's good for me. I'm about 20 basis points from needing to buy more. Everything else going up and this going down makes the band easy to hit. :-)
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Re: My Favorite Alternative Funds

Post by nedsaid » Sat Jul 15, 2017 10:26 am

This discussion reminds me of Larry Swedroe's comment that investors need a strong belief system in order to stick with your investments when markets go bad. He has also commented that the factor tilts can underperform for years at a time and that factor investors need patience.

This whole realm of alternative funds ventures into this area of beliefs and convictions. This is particularly so in the case of alternative funds as these vehicles are new and relatively untested. You have to trust the advisors recommending this products and the academic research behind them. Pretty much, you have to make the decision to "get with the program."
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Re: My Favorite Alternative Funds

Post by packer16 » Sat Jul 15, 2017 12:43 pm

The one thing about a belief, like value vs. growth, is that you have to determine if the parameter you are talking about (value in this case) has a positive excess return or is more cyclical. With long and not regular cycles, the apparent excess return could be nothing more than the upside of a cycle. 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.

The alternatives I like are based upon cash flows from firms whose economics are tied to contractual or recurring revenues so they can provide bond like diversification versus trading strategies where the underlying securities have exposure to stock risk & are dependent removing that risk by some means whose correlation to stock returns can change over time. Whenever, I think of these strategies my head explodes at the complexity & how hard managing it must be. I put it in the too hard pile very quickly in comparison to my contractual or recurring revenue alternatives.

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Re: My Favorite Alternative Funds

Post by nisiprius » Sat Jul 15, 2017 1:12 pm

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?

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Re: My Favorite Alternative Funds

Post by nedsaid » Sat Jul 15, 2017 3:29 pm

I guess "Only" really doesn't mean only. Larry's model portfolio from the book still looks good to me. Really what you are seeing is the attempt to get around 2% yields from bonds. If bonds were yielding 6% and not 2%, there would be little talk about the alternatives.
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Re: My Favorite Alternative Funds

Post by grok87 » Sat Jul 15, 2017 3:36 pm

packer16 wrote:The one thing about a belief, like value vs. growth, is that you have to determine if the parameter you are talking about (value in this case) has a positive excess return or is more cyclical. With long and not regular cycles, the apparent excess return could be nothing more than the upside of a cycle. 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.

The alternatives I like are based upon cash flows from firms whose economics are tied to contractual or recurring revenues so they can provide bond like diversification versus trading strategies where the underlying securities have exposure to stock risk & are dependent removing that risk by some means whose correlation to stock returns can change over time. Whenever, I think of these strategies my head explodes at the complexity & how hard managing it must be. I put it in the too hard pile very quickly in comparison to my contractual or recurring revenue alternatives.

Packer
Agree.

1) When one looks for example at long-short momentum for US stocks, the track record is just not there.

ten year........... 1997-2016: CAGR = -12%
twenty year.......1987-2016: CAGR = -2.2%
thirty year.........1977-2016: CAGR = +1.7%
forty year..........1967-2016: CAGR = 4.5%

since the standalone returns are so meagre and the tails so fat, if one wants to persist in belief in momentum one needs to fall back on "correlation benefit" type arguments. the trouble with this is that "investing is not physics"- the correlations are not stable as you point out above.

I'd rather invest in something that has strong evidence for a positive expected return on its own rather than hope that future correlations turn out as they did in the past.

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

in their latest model
https://www.forbes.com/sites/phildemuth ... 561ece1138
its been replaced by profitability and "low investment". i.e. companies with high gross profitability = (revenue - "cost of goods sold")/assets have higher expected stock returns as do companies with low investment (i.e. they are not upgrading their factories all the time i guess). when those two factors are added in the value factor is no longer statistically significant.

their new factors sound related to your notion of contractual or recurring revenues. what morningstar calls "wide moats" i guess. e.g. companies that are in the position to achieve high gross profits and don't have to invest a lot in their businesses (cause they are insulated from their competition by those wide moats i guess)

cheers,
grok
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Re: My Favorite Alternative Funds

Post by Robert T » Sat Jul 15, 2017 4:33 pm

grok87 wrote: 2) Fama and French don't believe in the value premium any more either.
https://famafrench.dimensional.com/ques ... ndant.aspx
  • "In practical terms, since there is indeed a value premium, it is still quite legitimate for investors to target it in portfolio decisions. The expected benefits from doing so have not changed."
.

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Re: My Favorite Alternative Funds

Post by grok87 » Sat Jul 15, 2017 4:45 pm

Robert T wrote:
grok87 wrote: 2) Fama and French don't believe in the value premium any more either.
https://famafrench.dimensional.com/ques ... ndant.aspx
  • "In practical terms, since there is indeed a value premium, it is still quite legitimate for investors to target it in portfolio decisions. The expected benefits from doing so have not changed."
.
Thanks Robert that was a good read.
I could pick out quotes from it to equally support my statement but i'd rather not start a quote battle.
:)
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Re: My Favorite Alternative Funds

Post by Avo » Sat Jul 15, 2017 4:55 pm

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.

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