Cliff Asness: Liquid Alt Ragnarok?

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Cliff Asness: Liquid Alt Ragnarok?

Post by Random Walker » Sun Sep 09, 2018 9:14 am

https://images.aqr.com/-/media/AQR/Docu ... C168F8AC76

I’m still not clear on the title, but this is a Cliff Asness tour de force. His liquid alternatives (eg QSPIX) have apparently hit a rough patch over the better part of the last year, and he addresses that in this article. But that is not the reason I believe most Bogleheads should read the article. Rather, the article can be applied far more generally to all of our investments and investing. All investments will go through rough patches. IN FACT, IT IS BECAUSE THERE ARE ROUGH PATCHES THAT PREMIA LIKELY EXIST. Cliff reminds investors to focus on the enduring reasons the investor initially chose the strategy. These include rational intuitive risk based or behavioral based explanations supported by persistent and pervasive data. He reviews the importance of looking at the portfolio as a whole and the value of non correlated assets within the portfolio. He touches on issues such as current valuations (and possible increased benefit to alts in this setting, weaknesses of Sharpe ratio, explanation of long-short, and lots of behavioral issues.

In fact, the behavioral issues are a huge part of this essay. Everyone knows Asness is brilliant. What makes his writing so wonderful is his humble, light hearted, very human tone. Anyone who has read his Cliff’s Perspectives in the past knows that the footnotes are must read material as well. He vividly describes the behavioral and psychological issues that he deals with as the market twists, turns, gyrates. He clearly distinguishes his own personal ups and downs with the market from the mechanistic application of the AQR funds. He teaches how we should use the rationale we used in initially devising an investment plan to stick with the plan during tough times. It’s a long article, but very much worth the time and effort.

Dave

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Re: Cliff Asness: Liquid Alt Ragnarok?

Post by reformed.trader » Sun Sep 09, 2018 9:26 am

Random, any decent liquid alt ETF funds you know of?

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Re: Cliff Asness: Liquid Alt Ragnarok?

Post by Random Walker » Sun Sep 09, 2018 10:06 am

I don’t know of any, but I’m totally uninformed on the issue. Probably lots of investments out there, I just haven’t looked and likely wouldn’t do a good job evaluating them anyways. I’m only somewhat familiar with AQR and Stone Ridge.

Dave

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Re: Cliff Asness: Liquid Alt Ragnarok?

Post by Random Walker » Sun Sep 09, 2018 1:55 pm

Nisiprius, that’s pretty impressive! In one of the footnotes, it’s also stated that Ragnarok is in comic books too :-)

Dave

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Re: Cliff Asness: Liquid Alt Ragnarok?

Post by nisiprius » Sun Sep 09, 2018 2:20 pm

Random Walker wrote:
Sun Sep 09, 2018 1:55 pm
Nisiprius, that’s pretty impressive! In one of the footnotes, it’s also stated that Ragnarok is in comic books too :-)

Dave
Oops, decided to delete my posting on Ragnarök. I'd responded to Dave's remark about "still not clear on the title" because I noticed that Asness explains it in his own footnote. He says "For the poor benighted souls who didn’t read the comics or see the movie (or studied actual mythology which is much harder) Ragnarök is basically the end of the world in Norse Mythology. Think 'Apocalypse' with horned helmets." See Wikipedia's article on Ragnarök. I think there's something about a superhero named Thor in the Marvel universe, so maybe that's what he means by "the comics."
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Re: Cliff Asness: Liquid Alt Ragnarok?

Post by typical.investor » Sun Sep 09, 2018 4:56 pm

nisiprius wrote:
Sun Sep 09, 2018 2:20 pm
Random Walker wrote:
Sun Sep 09, 2018 1:55 pm
Nisiprius, that’s pretty impressive! In one of the footnotes, it’s also stated that Ragnarok is in comic books too :-)

Dave
Oops, decided to delete my posting on Ragnarök. I'd responded to Dave's remark about "still not clear on the title" because I noticed that Asness explains it in his own footnote. He says "For the poor benighted souls who didn’t read the comics or see the movie (or studied actual mythology which is much harder) Ragnarök is basically the end of the world in Norse Mythology. Think 'Apocalypse' with horned helmets." See Wikipedia's article on Ragnarök. I think there's something about a superhero named Thor in the Marvel universe, so maybe that's what he means by "the comics."
Cliff is horribly confused on the title and most certainly misunderstands Ragnarok.

Cliff stated about quantitative strategies’ tough 2018:
Cliff wrote:Here’s a preview: It’s not Ragnarök — unless you think Ragnarök is expected to occur occasionally
Some might agree with with Cliff, but actually it is Ragnarök and Ragnarök is expected to occur occasionally:
scholars, such as historian of religions Mircea Eliade[4] and Old Norse philologist Rudolf Simek[5] have realized that the tale of Ragnarok conveys a very, very different message. Given that the accounts of the destruction of the world in the Old Norse primary sources are immediately followed by accounts of its re-creation, the assertion that Ragnarok describes the end of linear history is completely unfounded. A more sensitive reading of the primary sources makes it obvious that what Ragnarok describes is a cyclical end of the world, after which follows a new creation, which will in turn be followed by another Ragnarok, and so on throughout eternity. In other words, creation and destruction are points at opposite ends of a circle, not points at opposite ends of a straight line.
A friend with a PHD in Norse Mythology taught me that actually and the above reference is from https://norse-mythology.org/tales/ragnarok/

Cliff also states:
Cliff wrote:All of this has happened before and will happen again. And that’s ok. It’s more than ok. It’s necessary. The painful and difficult times are a big part of why we’re convinced these things are real and can improve long-term results for those who can allocate part of their portfolio to them and then stick with it. We indeed must “embrace the suck” as it’s likely why we can be long-term successful.
(Thor Ragnarök - spoiler alert)
Anyway, even the Marvel movie shows Thor embracing Ragnarök. It's fundamental to life.

Skol, Vikings!
Last edited by typical.investor on Sun Sep 09, 2018 5:44 pm, edited 1 time in total.

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Re: Cliff Asness: Liquid Alt Ragnarok?

Post by AlphaLess » Sun Sep 09, 2018 5:38 pm

I don't trust Cliff Asness. Another snake oil salesman.
"You can get more with a kind word and a gun than with just a kind word." George Washington

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Re: Cliff Asness: Liquid Alt Ragnarok?

Post by Random Walker » Sun Sep 09, 2018 6:11 pm

In the FAQ section at the end, Cliff does a great job of explaining some of the rationale behind volatility scaling. It doesn’t just help volatility, it also helps I think correlation to macro events. This is also related to the tracking error pain of “losing unconventionally”
Why is this happening without a big global catalyst?
This is clearly related to the issue of “losing unconventionally” but it is worth discussing again in this subtly different context. Sometimes bad times have a big obvious reason (e.g., the tech bubble) and sometimes not (August 2007). The idea is that by being market-neutral and scaling your positions to target a relatively consistent level of volatility, something we do in liquid alts, you should be able to create a return stream that is less dependent on macro events, less dependent on market wide volatility, and more consistent in its own volatility. Volatility targeting or scaling means in high volatility times positions are smaller, so when big events are happening they often don’t have as big an impact (good or bad) as you might think. But we’ve been in a low volatility period for a while now, and economic events haven’t been very large. Here, volatility targeting makes the events that do happen more meaningful. The idea behind this scaling is an attempt to even out your risk over time. If you can do that successfully, you can make your process even less affected by what’s going on in the world, but, again, less explainable with simple stories. Better process but tougher story to explain. Again!76
Dave

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Re: Cliff Asness: Liquid Alt Ragnarok?

Post by Random Walker » Sun Sep 09, 2018 6:20 pm

AlphaLess wrote:
Sun Sep 09, 2018 5:38 pm
I don't trust Cliff Asness. Another snake oil salesman.
To me a good measure of someone’s honesty is the internal consistency of everything they say. Did you read anything in the article that didn’t fit right?

Dave

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Re: Cliff Asness: Liquid Alt Ragnarok?

Post by lack_ey » Sun Sep 09, 2018 6:44 pm

reformed.trader wrote:
Sun Sep 09, 2018 9:26 am
Random, any decent liquid alt ETF funds you know of?
I don't know of any and I've looked.

IQ Hedge Multi-Strategy Tracker ETF (QAI) is the biggest and most famous, but it's a beta replicator that under the hood just owns long-only ETFs, has delivered no value—positive returns but negative alpha after accounting for its passive stock and bond exposures.

There's WisdomTree Managed Futures Strategy Fund (WTMF), which covers a specific category. I forgot what my assessment of it was, but I didn't particularly see much I liked here IIRC based on the underlying strategies and implementation, and its performance so far has trailed the category. Maybe just bad luck.

I don't really like some of the components of JPMorgan Diversified Alternatives ETF (JPHF) like the global macro piece and the performance after accounting for its passive exposures has been pretty bad. Maybe it's been an unlucky two years but I haven't really kept up with it.

There are some equity long/short ETFs, mostly have been significantly net long though these have actually delivered some so far above equity beta.

Everything else is pretty small, like under $100 M, unless you include things like short VIX (futures) ETNs.


As for the piece by Asness, you have to expect asset managers to explain their points of view. Of course it will be in part self serving. No duh. But I think most of what's here from what I skimmed is pretty reasonable, fairly standard, should mostly go without saying. Some decent lessons I guess. Don't freak out over losses that fall well within expectations, but continue to learn and question things. It's going to mean different things to different people and that's fine.

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Re: Cliff Asness: Liquid Alt Ragnarok?

Post by Theoretical » Sun Sep 09, 2018 6:57 pm

lack_ey wrote:
Sun Sep 09, 2018 6:44 pm
reformed.trader wrote:
Sun Sep 09, 2018 9:26 am
Random, any decent liquid alt ETF funds you know of?
I don't know of any and I've looked.

IQ Hedge Multi-Strategy Tracker ETF (QAI) is the biggest and most famous, but it's a beta replicator that under the hood just owns long-only ETFs, has delivered no value—positive returns but negative alpha after accounting for its passive stock and bond exposures.

There's WisdomTree Managed Futures Strategy Fund (WTMF), which covers a specific category. I forgot what my assessment of it was, but I didn't particularly see much I liked here IIRC based on the underlying strategies and implementation, and its performance so far has trailed the category. Maybe just bad luck.

I don't really like some of the components of JPMorgan Diversified Alternatives ETF (JPHF) like the global macro piece and the performance after accounting for its passive exposures has been pretty bad. Maybe it's been an unlucky two years but I haven't really kept up with it.

There are some equity long/short ETFs, mostly have been significantly net long though these have actually delivered some so far above equity beta.

Everything else is pretty small, like under $100 M, unless you include things like short VIX (futures) ETNs.


As for the piece by Asness, you have to expect asset managers to explain their points of view. Of course it will be in part self serving. No duh. But I think most of what's here from what I skimmed is pretty reasonable, fairly standard, should mostly go without saying. Some decent lessons I guess. Don't freak out over losses that fall well within expectations, but continue to learn and question things. It's going to mean different things to different people and that's fine.
Alt ETFs are the dregs of the barrel, because the best Alt funds have significant minimums and mutual fund transaction fees to limit churn. The Mutual Funds may be inferior to the institutional LPs, but the Alt ETFs definitely are.

I've been really disappointed with the JP Morgan Managed Futures ETF. There's a reason it's so cheap - super-low volatility - which you DON'T want in a managed futures fund if you want it to be a diversifier and not an expensive t-Bill holder.

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Re: Cliff Asness: Liquid Alt Ragnarok?

Post by AlphaLess » Sun Sep 09, 2018 6:59 pm

Random Walker wrote:
Sun Sep 09, 2018 6:20 pm
AlphaLess wrote:
Sun Sep 09, 2018 5:38 pm
I don't trust Cliff Asness. Another snake oil salesman.
To me a good measure of someone’s honesty is the internal consistency of everything they say. Did you read anything in the article that didn’t fit right?

Dave
Honesty is not the only requirement to succeed.
Also, one article is not a measure of honesty. How about taking everything that he has written, and then apply your metric to that?
"You can get more with a kind word and a gun than with just a kind word." George Washington

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Re: Cliff Asness: Liquid Alt Ragnarok?

Post by grok87 » Sun Sep 09, 2018 7:49 pm

Random Walker wrote:
Sun Sep 09, 2018 6:11 pm
In the FAQ section at the end, Cliff does a great job of explaining some of the rationale behind volatility scaling. It doesn’t just help volatility, it also helps I think correlation to macro events. This is also related to the tracking error pain of “losing unconventionally”
Why is this happening without a big global catalyst?
This is clearly related to the issue of “losing unconventionally” but it is worth discussing again in this subtly different context. Sometimes bad times have a big obvious reason (e.g., the tech bubble) and sometimes not (August 2007). The idea is that by being market-neutral and scaling your positions to target a relatively consistent level of volatility, something we do in liquid alts, you should be able to create a return stream that is less dependent on macro events, less dependent on market wide volatility, and more consistent in its own volatility. Volatility targeting or scaling means in high volatility times positions are smaller, so when big events are happening they often don’t have as big an impact (good or bad) as you might think. But we’ve been in a low volatility period for a while now, and economic events haven’t been very large. Here, volatility targeting makes the events that do happen more meaningful. The idea behind this scaling is an attempt to even out your risk over time. If you can do that successfully, you can make your process even less affected by what’s going on in the world, but, again, less explainable with simple stories. Better process but tougher story to explain. Again!76
Dave
well to state the obvious, then in low volatility times positions are larger. and then volatility spikes and one is forces to liquidate some of one's positions at the worst possible time. sounds like long term capital management to me.
Keep calm and Boglehead on. KCBO.

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Re: Cliff Asness: Liquid Alt Ragnarok?

Post by Elysium » Sun Sep 09, 2018 8:13 pm

AlphaLess wrote:
Sun Sep 09, 2018 5:38 pm
I don't trust Cliff Asness. Another snake oil salesman.
I don't know any snake oil salesmen, so can't comment if the comparison is true. But, I do know that this guy is a billionaire hedge fund manager who has put his high education status to advance himself and build a fortune for himself. Nothing wrong with that, everyone should strive to become the best that they can become. This guy thinks the active manager with average talent will underperform the indexes, but he thinks he is an above average active manager. This is directly attributed to his own words. Now, where can I find an active manager who doesn't think that of themself.

Then there is Jack Bogle who has put his talents and life to advance the cause of ordinary investors like us, to give everyone a fair shake. We cannot expect everyone to be like Bogle, that is why he is referred to as Saint Jack, and stands alone at the top of financial figures.

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Re: Cliff Asness: Liquid Alt Ragnarok?

Post by skeptical » Sun Sep 09, 2018 8:38 pm

An in depth look at AQR funds performance from early 2017, well before this “2018 rough patch"

https://www.ifa.com/articles/deeper_look_performance/

summary:
67% (16 funds) have underperformed their respective benchmarks since inception, having delivered a NEGATIVE alpha
33% (8 funds) have outperformed their respective benchmarks since inception, having delivered a POSTIVE alpha
0% (0 funds) have outperformed their respective benchmarks consistently enough since inception to provide 95% confidence that such outperformance will persist as opposed to being based on random outcomes

I love this forum, it has changed my financial life, and I love reading the conversations. It has made me a big believer in low cost, general market index funds, keeping things simple, and accepting the fact that I know nothing about how the market will perform.

What I find fascinating is difference in response given to the likes of active investing/Edward Jones/generic financial advisors, etc and to the likes of AQR, QSPIX, SRRIX, LENDX.

All of them are high expense, complex financial products sold by highly paid salespeople. For each type of customer, there will always be a sales approach - be it mitigating their fear, standing in as their expert in an area they know they do not understand, or catering to their intelligence/knowledge and desire to be the smart one in the room.

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Re: Cliff Asness: Liquid Alt Ragnarok?

Post by lack_ey » Sun Sep 09, 2018 9:21 pm

grok87 wrote:
Sun Sep 09, 2018 7:49 pm
well to state the obvious, then in low volatility times positions are larger. and then volatility spikes and one is forces to liquidate some of one's positions at the worst possible time. sounds like long term capital management to me.
Frequently vol spikes prior to the large losses.

But even if not, is that even the worst possible time? Under a naive random walk model, forward expected returns are not related to recent past performance (so being down is not a worse time than any other to sell). In the real world with stocks and some other assets, past 1-yr return is basically uncorrelated to forward 1-yr return. With some different periods there are some other patterns. For some differential trades (such as long high momentum stocks, short low momentum stocks), it's even less clear to me that you should expect higher forward returns—never mind higher Sharpe ratios—after vol spikes. I don't really know.

LTCM was very different and had to liquidate because it was over-leveraged and losing too much money on a number of things, in crowded trades and getting some things directionally wrong. I would say the problem was losing money more so than the "liquidate some of one's positions at the worst possible time."

Or wait, is your point that liquidating a lot in a short period effectively results in huge transaction costs? But that's not really what happens with vol scaling unless you're heavily leveraged and need to make huge adjustments all at once, where you're forced out. I think normally a fund would sell gradually when vol scaling.

In any case, vol scaling is obviously not some kind of magic, just probably better for some of these strategies than not doing it. It's obviously going to hurt sometimes. Other times it will help.



skeptical wrote:
Sun Sep 09, 2018 8:38 pm
An in depth look at AQR funds performance from early 2017, well before this “2018 rough patch"

https://www.ifa.com/articles/deeper_look_performance/

summary:
67% (16 funds) have underperformed their respective benchmarks since inception, having delivered a NEGATIVE alpha
33% (8 funds) have outperformed their respective benchmarks since inception, having delivered a POSTIVE alpha
0% (0 funds) have outperformed their respective benchmarks consistently enough since inception to provide 95% confidence that such outperformance will persist as opposed to being based on random outcomes
Their long-only funds don't do a lot of things, are IMHO and in many estimations overpriced compared to what many others offer. Some of the bad performance is from the underlying factors not being that good in the period looked at; others just have been bad, I'm not sure why. The alt funds have been more of a mixed bag. Some have been good, others not.

I don't particularly think this is pertinent to understanding how liquid alts have been doing recently or the points Asness is making in the piece, but I guess this was more a general-purpose comment.
skeptical wrote:
Sun Sep 09, 2018 8:38 pm
I love this forum, it has changed my financial life, and I love reading the conversations. It has made me a big believer in low cost, general market index funds, keeping things simple, and accepting the fact that I know nothing about how the market will perform.
It's possible that there are some things that can be known to a sufficient extent to make some other, maybe better decisions. Simplicity may not actually be best or optimal. There are just a lot of ways to do worse.
skeptical wrote:
Sun Sep 09, 2018 8:38 pm
What I find fascinating is difference in response given to the likes of active investing/Edward Jones/generic financial advisors, etc and to the likes of AQR, QSPIX, SRRIX, LENDX.
Even within the alt kinds of funds you mention, there are some big differences. But I think there's an important distinction to be made between "beta" type alt funds that are just long some nontraditional asset that very much should probably have a positive expected return, and trading or long/short style alternatives that trade traditional assets (and some other things like commodities futures) or derivatives based on them, where they're looking for a differential return from X beating Y.

But I think some of the difference in response you note comes from some investment ideas and justifications being more data driven than others. I guess in some fields including finance the term people like to use is "evidence based," whatever that means. As always there are differences in interpretations and conclusions drawn from the data.
skeptical wrote:
Sun Sep 09, 2018 8:38 pm
All of them are high expense, complex financial products sold by highly paid salespeople. For each type of customer, there will always be a sales approach - be it mitigating their fear, standing in as their expert in an area they know they do not understand, or catering to their intelligence/knowledge and desire to be the smart one in the room.
And some are probably better than others. A few are not really that expensive, like Vanguard Market Neutral (equity market neutral fund).

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Re: Cliff Asness: Liquid Alt Ragnarok?

Post by grok87 » Mon Sep 10, 2018 4:44 pm

lack_ey wrote:
Sun Sep 09, 2018 9:21 pm
grok87 wrote:
Sun Sep 09, 2018 7:49 pm
well to state the obvious, then in low volatility times positions are larger. and then volatility spikes and one is forces to liquidate some of one's positions at the worst possible time. sounds like long term capital management to me.
Frequently vol spikes prior to the large losses.

But even if not, is that even the worst possible time? Under a naive random walk model, forward expected returns are not related to recent past performance (so being down is not a worse time than any other to sell). In the real world with stocks and some other assets, past 1-yr return is basically uncorrelated to forward 1-yr return. With some different periods there are some other patterns. For some differential trades (such as long high momentum stocks, short low momentum stocks), it's even less clear to me that you should expect higher forward returns—never mind higher Sharpe ratios—after vol spikes. I don't really know.

LTCM was very different and had to liquidate because it was over-leveraged and losing too much money on a number of things, in crowded trades and getting some things directionally wrong. I would say the problem was losing money more so than the "liquidate some of one's positions at the worst possible time."

Or wait, is your point that liquidating a lot in a short period effectively results in huge transaction costs? But that's not really what happens with vol scaling unless you're heavily leveraged and need to make huge adjustments all at once, where you're forced out. I think normally a fund would sell gradually when vol scaling.

In any case, vol scaling is obviously not some kind of magic, just probably better for some of these strategies than not doing it. It's obviously going to hurt sometimes. Other times it will help.
I think your last two sentences are key. It would be interesting to look at a portfolio of say cash and us stocks that targets a certain level of volatility based on the vix and how that would have performed through say the 1987 crash and the global financial crisis. As opppsed to say a fixed 60/40 stocks/cash portfolio that is periodically rebalanced. If I can find the data on the vix i’ll Give it a go.
Keep calm and Boglehead on. KCBO.

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Re: Cliff Asness: Liquid Alt Ragnarok?

Post by larryswedroe » Mon Sep 10, 2018 5:17 pm

Few thing to keep in mind.

As noted AQR funds use limited amounts of leverage, maybe 3-4 times and they do so in relatively lower volatility factors. LTCM was leveraged at 100 to 1 or more. Thus a 1% move could wipe them out. Second, funds like QSPRX are well diversified across factors with very low to negative correlation. So the sum of the individual volatilities is higher than that of the portfolio. For example, defensive tends to do well while carry might be doing poorly in flight to quality. And of course MOM and VALUE are negatively correlated. That low correlation reduces the risks of the already limited leverage considerably. Also LTCM failed for reasons that literally had NOTHING to do with their models and everything to do with hubris (they just made purely directional bets that had nothing to do with models).

We see the results when you have value getting slaughtered, down like 9% as I mentioned, but other three are up year to date.

Very different than just leveraging VIX. But there the research does show, say with managed futures, that scaling volatility has improved results. Several studies have found this and reason is that vol tends to predict vol. So higher than average vol predicts higher than average vol and vice versa.

Larry

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Re: Cliff Asness: Liquid Alt Ragnarok?

Post by lack_ey » Mon Sep 10, 2018 6:04 pm

grok87 wrote:
Mon Sep 10, 2018 4:44 pm
I think your last two sentences are key. It would be interesting to look at a portfolio of say cash and us stocks that targets a certain level of volatility based on the vix and how that would have performed through say the 1987 crash and the global financial crisis. As opppsed to say a fixed 60/40 stocks/cash portfolio that is periodically rebalanced. If I can find the data on the vix i’ll Give it a go.
Forget VIX, especially as its series is not that old.

Just scale by previous-month (or 30 or 50 or however many trading days) actual vol. That should have significant overlap with the VIX signal and you can get that data easily from 1926 via Fama-French market factor daily series.

Or I guess better would be to do both and compare.

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Re: Cliff Asness: Liquid Alt Ragnarok?

Post by jhfenton » Mon Sep 10, 2018 6:51 pm

AlphaLess wrote:
Sun Sep 09, 2018 5:38 pm
I don't trust Cliff Asness. Another snake oil salesman.
I don't own any of his funds. They are both too expensive and too difficult to access for me.

But I've seen nothing but openness and honesty from Asness. He readily admits that active management collectively is a losing game.

For what it's worth, he is Jack Bogle's favorite hedge fund manager. They are friendly rivals.
lack_ey wrote:
Sun Sep 09, 2018 6:44 pm
reformed.trader wrote:
Sun Sep 09, 2018 9:26 am
Random, any decent liquid alt ETF funds you know of?
I don't know of any and I've looked.
+1
Theoretical wrote:
Sun Sep 09, 2018 6:57 pm
Alt ETFs are the dregs of the barrel, because the best Alt funds have significant minimums and mutual fund transaction fees to limit churn. The Mutual Funds may be inferior to the institutional LPs, but the Alt ETFs definitely are.

I've been really disappointed with the JP Morgan Managed Futures ETF. There's a reason it's so cheap - super-low volatility - which you DON'T want in a managed futures fund if you want it to be a diversifier and not an expensive t-Bill holder.
+2 I'm not sure the best strategies could even be implemented in an ETF.

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Re: Cliff Asness: Liquid Alt Ragnarok?

Post by nisiprius » Mon Sep 10, 2018 8:21 pm

skeptical wrote:
Sun Sep 09, 2018 8:38 pm
An in depth look at AQR funds performance from early 2017, well before this “2018 rough patch"

https://www.ifa.com/articles/deeper_look_performance/

summary:
67% (16 funds) have underperformed their respective benchmarks since inception, having delivered a NEGATIVE alpha
33% (8 funds) have outperformed their respective benchmarks since inception, having delivered a POSTIVE alpha
0% (0 funds) have outperformed their respective benchmarks consistently enough since inception to provide 95% confidence that such outperformance will persist as opposed to being based on random outcomes
1) To determine that QSPIX underperformed its "respective benchmark," the authors had to choose a benchmark.

Image

They chose Morningstar Moderate Target Risk Total Return. They don't say why they chose that benchmark. Was it appropriate?

2) AQR itself measures QSPIX against a benchmark of three month Treasury bills :!: :?: :shock: . It beat that benchmark by a mile. Was that benchmark appropriate?

Image

In short, IFA was stating that QSPIX didn't perform as expected, but IFA didn't really have any good basis for that expectation.

Does anyone have any sensible answer as to how to benchmark QSPIX? It seems to me that in reading the IFA article we are basically trusting IFA's judgement, "well, gosh, we don't think this fund lived up to our expectation," while fund owners have said in effect "we don't have a benchmark, but we trust our advisory service which said it lived up to their expectation."
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Re: Cliff Asness: Liquid Alt Ragnarok?

Post by columbia » Mon Sep 10, 2018 8:51 pm

nisiprius wrote:
Mon Sep 10, 2018 8:21 pm
skeptical wrote:
Sun Sep 09, 2018 8:38 pm
An in depth look at AQR funds performance from early 2017, well before this “2018 rough patch"

https://www.ifa.com/articles/deeper_look_performance/

summary:
67% (16 funds) have underperformed their respective benchmarks since inception, having delivered a NEGATIVE alpha
33% (8 funds) have outperformed their respective benchmarks since inception, having delivered a POSTIVE alpha
0% (0 funds) have outperformed their respective benchmarks consistently enough since inception to provide 95% confidence that such outperformance will persist as opposed to being based on random outcomes
1) To determine that QSPIX underperformed its "respective benchmark," the authors had to choose a benchmark.

Image

They chose Morningstar Moderate Target Risk Total Return. They don't say why they chose that benchmark. Was it appropriate?

2) AQR itself measures QSPIX against a benchmark of three month Treasury bills :!: :?: :shock: . It beat that benchmark by a mile. Was that benchmark appropriate?

Image

In short, IFA was stating that QSPIX didn't perform as expected, but IFA didn't really have any good basis for that expectation.

Does anyone have any sensible answer as to how to benchmark QSPIX? It seems to me that in reading the IFA article we are basically trusting IFA's judgement, "well, gosh, we don't think this fund lived up to our expectation," while fund owners have said in effect "we don't have a benchmark, but we trust our advisory service which said it lived up to their expectation."

How can there be a benchmark, when they don’t even tell you the specifics of the investments:
https://funds.aqr.com/our-funds/alterna ... ative-fund

I guess folks are just supposed to have faith in their proprietary management choices. A sane investor would demand to know the full details.

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Re: Cliff Asness: Liquid Alt Ragnarok?

Post by lack_ey » Mon Sep 10, 2018 9:19 pm

columbia wrote:
Mon Sep 10, 2018 8:51 pm
How can there be a benchmark, when they don’t even tell you the specifics of the investments:
https://funds.aqr.com/our-funds/alterna ... ative-fund

I guess folks are just supposed to have faith in their proprietary management choices. A sane investor would demand to know the full details.
Quarterly attributions for each underlying subcomponent are available, just not to general public.

The underlying fund strategy is explained in this journal paper, Investing with Style:
http://faculty.chicagobooth.edu/tobias. ... LISHED.pdf

Here in a lighter format in another journal, I think probably more an industry perspective rather than a full academic paper:
https://images.aqr.com/-/media/AQR/Docu ... Premia.pdf

You can check the annual reports etc.

What were you not seeing, like top holdings? When there are hundreds of small positions and not following an obvious pattern I don't think that's really any kind of illustrative. The summary risk exposures are a lot more informative. Though of course as a mutual fund the holdings are regularly disclosed.

I would like to see more info out there but realistically this is a more transparency than basically any fund that's not an index fund or extremely simple, more than Vanguard's active funds or many others'.


nisiprius wrote:
Mon Sep 10, 2018 8:21 pm
Does anyone have any sensible answer as to how to benchmark QSPIX? It seems to me that in reading the IFA article we are basically trusting IFA's judgement, "well, gosh, we don't think this fund lived up to our expectation," while fund owners have said in effect "we don't have a benchmark, but we trust our advisory service which said it lived up to their expectation."
It depends on the purpose of the benchmark and what you're trying to understand. Is it to check the fund's performance relative to peers? To analyze the fund's effective transaction costs and other frictions? To see if any alpha was generated (relative to what)? To compare the fund performance to a weighted collection of factor targets that might be obtainable elsewhere? To see the performance relative to readily available portfolio building block components? And so on.

It's not really obvious what to use, but suffice to say that a long-only balanced stock and bond allocation is an inappropriate benchmark for checking fund alpha in that context (running statistical significance tests to evaluate skill).

For many funds, an appropriate benchmark for a number of purposes would be an index representing the fund's passive (or let's say average) risk exposures, which in many cases is relatively cheaply investable though index funds. There's of course no index that's remotely close to what's happening here.

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Re: Cliff Asness: Liquid Alt Ragnarok?

Post by Jebediah » Mon Sep 10, 2018 10:29 pm

Random Walker wrote:
Sun Sep 09, 2018 9:14 am
https://images.aqr.com/-/media/AQR/Docu ... C168F8AC76

Everyone knows Asness is brilliant.
I've never seen evidence that Asness is brilliant.

Theoretical
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Re: Cliff Asness: Liquid Alt Ragnarok?

Post by Theoretical » Mon Sep 10, 2018 11:23 pm

columbia wrote:
Mon Sep 10, 2018 8:51 pm
nisiprius wrote:
Mon Sep 10, 2018 8:21 pm
skeptical wrote:
Sun Sep 09, 2018 8:38 pm
An in depth look at AQR funds performance from early 2017, well before this “2018 rough patch"

https://www.ifa.com/articles/deeper_look_performance/

summary:
67% (16 funds) have underperformed their respective benchmarks since inception, having delivered a NEGATIVE alpha
33% (8 funds) have outperformed their respective benchmarks since inception, having delivered a POSTIVE alpha
0% (0 funds) have outperformed their respective benchmarks consistently enough since inception to provide 95% confidence that such outperformance will persist as opposed to being based on random outcomes
1) To determine that QSPIX underperformed its "respective benchmark," the authors had to choose a benchmark.

Image

They chose Morningstar Moderate Target Risk Total Return. They don't say why they chose that benchmark. Was it appropriate?

2) AQR itself measures QSPIX against a benchmark of three month Treasury bills :!: :?: :shock: . It beat that benchmark by a mile. Was that benchmark appropriate?

Image

In short, IFA was stating that QSPIX didn't perform as expected, but IFA didn't really have any good basis for that expectation.

Does anyone have any sensible answer as to how to benchmark QSPIX? It seems to me that in reading the IFA article we are basically trusting IFA's judgement, "well, gosh, we don't think this fund lived up to our expectation," while fund owners have said in effect "we don't have a benchmark, but we trust our advisory service which said it lived up to their expectation."

How can there be a benchmark, when they don’t even tell you the specifics of the investments:
https://funds.aqr.com/our-funds/alterna ... ative-fund

I guess folks are just supposed to have faith in their proprietary management choices. A sane investor would demand to know the full details.
https://funds.aqr.com/-/media/files/fun ... s/spaf.pdf

It’s in the fund documents and disclosures section.

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Re: Cliff Asness: Liquid Alt Ragnarok?

Post by grok87 » Tue Sep 11, 2018 6:09 am

lack_ey wrote:
Mon Sep 10, 2018 6:04 pm
grok87 wrote:
Mon Sep 10, 2018 4:44 pm
I think your last two sentences are key. It would be interesting to look at a portfolio of say cash and us stocks that targets a certain level of volatility based on the vix and how that would have performed through say the 1987 crash and the global financial crisis. As opppsed to say a fixed 60/40 stocks/cash portfolio that is periodically rebalanced. If I can find the data on the vix i’ll Give it a go.
Forget VIX, especially as its series is not that old.

Just scale by previous-month (or 30 or 50 or however many trading days) actual vol. That should have significant overlap with the VIX signal and you can get that data easily from 1926 via Fama-French market factor daily series.

Or I guess better would be to do both and compare.
So I fooled around with this last night. Looked at the period 1986-2003 which was the full data set for the old vix index based on the S&p 100. Will try to add 2003 to date tonite. I used daily price only returns for the S&p 500. I did daily rebalancing to a 10 vol.

Based on my initial analysis the volatility targeting subtracted about 0.4% from cagr over this period. And that of course is before transaction costs.
Keep calm and Boglehead on. KCBO.

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Re: Cliff Asness: Liquid Alt Ragnarok?

Post by lack_ey » Tue Sep 11, 2018 7:00 am

grok87 wrote:
Tue Sep 11, 2018 6:09 am
lack_ey wrote:
Mon Sep 10, 2018 6:04 pm
grok87 wrote:
Mon Sep 10, 2018 4:44 pm
I think your last two sentences are key. It would be interesting to look at a portfolio of say cash and us stocks that targets a certain level of volatility based on the vix and how that would have performed through say the 1987 crash and the global financial crisis. As opppsed to say a fixed 60/40 stocks/cash portfolio that is periodically rebalanced. If I can find the data on the vix i’ll Give it a go.
Forget VIX, especially as its series is not that old.

Just scale by previous-month (or 30 or 50 or however many trading days) actual vol. That should have significant overlap with the VIX signal and you can get that data easily from 1926 via Fama-French market factor daily series.

Or I guess better would be to do both and compare.
So I fooled around with this last night. Looked at the period 1986-2003 which was the full data set for the old vix index based on the S&p 100. Will try to add 2003 to date tonite. I used daily price only returns for the S&p 500. I did daily rebalancing to a 10 vol.

Based on my initial analysis the volatility targeting subtracted about 0.4% from cagr over this period. And that of course is before transaction costs.
Did you match the realized vol? What was the average position size when scaling and what was the static allocation?

Actually, I'll probably take a look at it myself in the next couple of days.

grok87
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Re: Cliff Asness: Liquid Alt Ragnarok?

Post by grok87 » Tue Sep 11, 2018 8:07 am

lack_ey wrote:
Tue Sep 11, 2018 7:00 am
grok87 wrote:
Tue Sep 11, 2018 6:09 am
lack_ey wrote:
Mon Sep 10, 2018 6:04 pm
grok87 wrote:
Mon Sep 10, 2018 4:44 pm
I think your last two sentences are key. It would be interesting to look at a portfolio of say cash and us stocks that targets a certain level of volatility based on the vix and how that would have performed through say the 1987 crash and the global financial crisis. As opppsed to say a fixed 60/40 stocks/cash portfolio that is periodically rebalanced. If I can find the data on the vix i’ll Give it a go.
Forget VIX, especially as its series is not that old.

Just scale by previous-month (or 30 or 50 or however many trading days) actual vol. That should have significant overlap with the VIX signal and you can get that data easily from 1926 via Fama-French market factor daily series.

Or I guess better would be to do both and compare.
So I fooled around with this last night. Looked at the period 1986-2003 which was the full data set for the old vix index based on the S&p 100. Will try to add 2003 to date tonite. I used daily price only returns for the S&p 500. I did daily rebalancing to a 10 vol.

Based on my initial analysis the volatility targeting subtracted about 0.4% from cagr over this period. And that of course is before transaction costs.
Did you match the realized vol? What was the average position size when scaling and what was the static allocation?

Actually, I'll probably take a look at it myself in the next couple of days.
The vxo/vix data goes back to 1986 which is helpful.
Keep calm and Boglehead on. KCBO.

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Re: Cliff Asness: Liquid Alt Ragnarok?

Post by sleepysurf » Tue Sep 11, 2018 8:14 am

...But I've seen nothing but openness and honesty from Asness. He readily admits that active management collectively is a losing game.

For what it's worth, he is Jack Bogle's favorite hedge fund manager. They are friendly rivals...
Here's a recent AQR Podcast with Cliff Asness and Jack Bogle "discussing" Active vs. Passive... https://www.aqr.com/Insights/Podcasts/T ... us-Passive
Retired 2018 | ~50/45/5 (partially sliced and diced)

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Re: Cliff Asness: Liquid Alt Ragnarok?

Post by vineviz » Tue Sep 11, 2018 10:13 am

grok87 wrote:
Mon Sep 10, 2018 4:44 pm
It would be interesting to look at a portfolio of say cash and us stocks that targets a certain level of volatility based on the vix and how that would have performed through say the 1987 crash and the global financial crisis. As opppsed to say a fixed 60/40 stocks/cash portfolio that is periodically rebalanced. If I can find the data on the vix i’ll Give it a go.
PortfolioVisualizer has a tool that might interest you It's buried in the "Market Timing Models" section, which I don't normally use, but one of the models allows you to create backtests with a "target volatility" of X%.

Basically you specify three parameters: some equity portfolio, a "cash asset", and your target volatility. Each month, the model creates some allocation between the equities and the cash that meets the volatility target based on the recent past.

The cash asset doesn't have to be cash: it can be a bond fund or a balanced fund, but the model only really works if it has substantially less vocality than the equity portfolio.

Likewise the "equity" portfolio doesn't need to be all stocks but if you include bonds they should probably be either long-term or leveraged in order to have enough volatility to be useful.

Here's an example.

https://www.portfoliovisualizer.com/tes ... n4_1=23.53

In this example the equity portfolio is:

17.74% ProShares Ultra S&P500 (SSO)
13.71% ProShares Ultra SmallCap600 (SAA)
45.02% Vanguard Long-Term Treasury Inv (VUSTX)
23.53% Vanguard FTSE Emerging Markets ETF (VWO)

The cash asset is Vanguard Short-Term Treasury Inv (VFISX).

I set a target volatility of 7%, which is roughly what a 60/40 portfolio has had over the past decade or two.

Since 2008, the cash asset has swung from 0% to 89% of the portfolio so it's a more aggressive model than I'd probably want to deploy. It's interesting to play around with, though.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

grok87
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Re: Cliff Asness: Liquid Alt Ragnarok?

Post by grok87 » Tue Sep 11, 2018 4:31 pm

vineviz wrote:
Tue Sep 11, 2018 10:13 am
grok87 wrote:
Mon Sep 10, 2018 4:44 pm
It would be interesting to look at a portfolio of say cash and us stocks that targets a certain level of volatility based on the vix and how that would have performed through say the 1987 crash and the global financial crisis. As opppsed to say a fixed 60/40 stocks/cash portfolio that is periodically rebalanced. If I can find the data on the vix i’ll Give it a go.
PortfolioVisualizer has a tool that might interest you It's buried in the "Market Timing Models" section, which I don't normally use, but one of the models allows you to create backtests with a "target volatility" of X%.

Basically you specify three parameters: some equity portfolio, a "cash asset", and your target volatility. Each month, the model creates some allocation between the equities and the cash that meets the volatility target based on the recent past.

The cash asset doesn't have to be cash: it can be a bond fund or a balanced fund, but the model only really works if it has substantially less vocality than the equity portfolio.

Likewise the "equity" portfolio doesn't need to be all stocks but if you include bonds they should probably be either long-term or leveraged in order to have enough volatility to be useful.

Here's an example.

https://www.portfoliovisualizer.com/tes ... n4_1=23.53

In this example the equity portfolio is:

17.74% ProShares Ultra S&P500 (SSO)
13.71% ProShares Ultra SmallCap600 (SAA)
45.02% Vanguard Long-Term Treasury Inv (VUSTX)
23.53% Vanguard FTSE Emerging Markets ETF (VWO)

The cash asset is Vanguard Short-Term Treasury Inv (VFISX).

I set a target volatility of 7%, which is roughly what a 60/40 portfolio has had over the past decade or two.

Since 2008, the cash asset has swung from 0% to 89% of the portfolio so it's a more aggressive model than I'd probably want to deploy. It's interesting to play around with, though.
Thanks
Keep calm and Boglehead on. KCBO.

grok87
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Re: Cliff Asness: Liquid Alt Ragnarok?

Post by grok87 » Tue Sep 11, 2018 5:28 pm

larryswedroe wrote:
Mon Sep 10, 2018 5:17 pm
Few thing to keep in mind.

As noted AQR funds use limited amounts of leverage, maybe 3-4 times and they do so in relatively lower volatility factors.
Larry, great to hAve you back posting again!

As far as I can tell from qspix’s fact sheet they are 340% long and 310% short. I think of that as being leveraged 6.5:1.


https://funds.aqr.com/-/media/files/fun ... s/spaf.pdf

Is that the standard way leverage is defined or not?

Thanks
Grok
Keep calm and Boglehead on. KCBO.

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Re: Cliff Asness: Liquid Alt Ragnarok?

Post by larryswedroe » Tue Sep 11, 2018 8:57 pm

Grok
Not really back, just posting on occasion to either correct misstatements or to provide answers to questions that others cannot, like the sources of returns to AQR funds this year.

As to that leverage, so you would consider a market neutral fund that is 100% long and 100% short to be 100% leveraged? I would say it's levered about 3.5:1 But either way, yours or mine, that's nowhere near the risk of a 100% leveraged long only equity which has market beta of say 2 vs 0 of this fund. And of course how much you are leveraged is only part of the issue. It's the volatility of what you leverage that also matters. So leveraging say T bills say 5x is less risky than no leverage on equity. And then there is the issue of correlation when leveraging multiple factors. If they have low/negative correlation then far less risky than if leveraging just single market beta factor.

So have to understand all of these issues.

Best wishes
Larry

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Re: Cliff Asness: Liquid Alt Ragnarok?

Post by AlphaLess » Tue Sep 11, 2018 10:20 pm

Elysium wrote:
Sun Sep 09, 2018 8:13 pm
AlphaLess wrote:
Sun Sep 09, 2018 5:38 pm
I don't trust Cliff Asness. Another snake oil salesman.
I don't know any snake oil salesmen, so can't comment if the comparison is true. But, I do know that this guy is a billionaire hedge fund manager who has put his high education status to advance himself and build a fortune for himself. Nothing wrong with that, everyone should strive to become the best that they can become. This guy thinks the active manager with average talent will underperform the indexes, but he thinks he is an above average active manager. This is directly attributed to his own words. Now, where can I find an active manager who doesn't think that of themself.

Then there is Jack Bogle who has put his talents and life to advance the cause of ordinary investors like us, to give everyone a fair shake. We cannot expect everyone to be like Bogle, that is why he is referred to as Saint Jack, and stands alone at the top of financial figures.
Here is a TYPICAL pitch of a salesman who wants to be perceived by potential clients as good:
- Profession X is ladden with conflicts,
- due to conflicts, hiring someone from profession X is generally not a good idea, on average,
- notice that I am disclosing these facts to you,
- and BTW, I have no issues affecting the MAJORITY of the practitioners of profession X.

This is a CLASSICAL play and well studied in organizational behavior.

Examples include:
- hedge fund managers,
- real estate brokers practicing dual agency,
- insurance salesmen who have a fiduciary responsibility to the companies they represent (while selling you crap).

If you CAREFULLY and EMPIRICALLY study what Cliff Asness has been recommending over years, you will realize that he is just basically lining up his pocket book.
"You can get more with a kind word and a gun than with just a kind word." George Washington

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Re: Cliff Asness: Liquid Alt Ragnarok?

Post by grok87 » Wed Sep 12, 2018 7:02 am

larryswedroe wrote:
Tue Sep 11, 2018 8:57 pm
Grok
Not really back, just posting on occasion to either correct misstatements or to provide answers to questions that others cannot, like the sources of returns to AQR funds this year.

As to that leverage, so you would consider a market neutral fund that is 100% long and 100% short to be 100% leveraged? I would say it's levered about 3.5:1 But either way, yours or mine, that's nowhere near the risk of a 100% leveraged long only equity which has market beta of say 2 vs 0 of this fund. And of course how much you are leveraged is only part of the issue. It's the volatility of what you leverage that also matters. So leveraging say T bills say 5x is less risky than no leverage on equity. And then there is the issue of correlation when leveraging multiple factors. If they have low/negative correlation then far less risky than if leveraging just single market beta factor.

So have to understand all of these issues.

Best wishes
Larry
Thanks Larry, much appreciated.
Hope you keep posting!
Cheers,
GrOk
Keep calm and Boglehead on. KCBO.

Elysium
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Re: Cliff Asness: Liquid Alt Ragnarok?

Post by Elysium » Wed Sep 12, 2018 7:06 am

AlphaLess wrote:
Tue Sep 11, 2018 10:20 pm
Elysium wrote:
Sun Sep 09, 2018 8:13 pm
AlphaLess wrote:
Sun Sep 09, 2018 5:38 pm
I don't trust Cliff Asness. Another snake oil salesman.
I don't know any snake oil salesmen, so can't comment if the comparison is true. But, I do know that this guy is a billionaire hedge fund manager who has put his high education status to advance himself and build a fortune for himself. Nothing wrong with that, everyone should strive to become the best that they can become. This guy thinks the active manager with average talent will underperform the indexes, but he thinks he is an above average active manager. This is directly attributed to his own words. Now, where can I find an active manager who doesn't think that of themself.

Then there is Jack Bogle who has put his talents and life to advance the cause of ordinary investors like us, to give everyone a fair shake. We cannot expect everyone to be like Bogle, that is why he is referred to as Saint Jack, and stands alone at the top of financial figures.
Here is a TYPICAL pitch of a salesman who wants to be perceived by potential clients as good:
- Profession X is ladden with conflicts,
- due to conflicts, hiring someone from profession X is generally not a good idea, on average,
- notice that I am disclosing these facts to you,
- and BTW, I have no issues affecting the MAJORITY of the practitioners of profession X.

This is a CLASSICAL play and well studied in organizational behavior.

Examples include:
- hedge fund managers,
- real estate brokers practicing dual agency,
- insurance salesmen who have a fiduciary responsibility to the companies they represent (while selling you crap).

If you CAREFULLY and EMPIRICALLY study what Cliff Asness has been recommending over years, you will realize that he is just basically lining up his pocket book.
This where I find distinction between DFA guys and AQR, even though they both are cut from the same cloth, and have been under the mentorship of Eugene Fama. DFA has come out on side of believing premium exists because of risk, and their strategies are mainly directed at improving efficiencies and keeping costs lower. Therefore, DFA strategies will give you whatever returns you can get out of their target pool of securities minus the cost. Where as, with AQR, there is no knowing what you will get, and you simply have to be a believer in a billionaire hedge fund manager with the backing of academic and industry research not widely accepted by anyone.

I have no problem with anyone using a financial advisor, because most people cannot manage on their own, and if they are invested in DFA funds there is no issue, as you could do much worse. I myself invest in DFA funds that are available to me through retirement accounts and college plans. I am pretty satisified with what they have done, which is being very true to their strategy that can be clearly benchmarked and tracked. I will not trust investing with someone who is being very opaque about that they do, other than point to erroneos or unsound academic research.

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Re: Cliff Asness: Liquid Alt Ragnarok?

Post by larryswedroe » Wed Sep 12, 2018 7:58 am

Just to correct the misstatements
I will not trust investing with someone who is being very opaque about that they do, other than point to erroneos or unsound academic research.
AQR is just as transparent as DFA. They are fully transparent providing in depth attribution analysis on regular basis.
They also rely totally on academic research and they don't do any active management in the Fama sense of the word, no individual security selection and no market timing (other than where using managed futures using a systematic trend following system). DFA even says they are active, but they use it in the same sense I do, that they are active in defining their universe of eligible securities, not in security selection. It's sad when you see people twist words to meet their preconceived notions.

I've also had the privilege of meeting with Asness and having dinner with him and he is incredibly nice and funny and humble guy who has built a great team of academics, think 73 PHDs, who are all transparent in their research and implementation.

We've even been in their trading rooms to watch how the algo programs work to minimize costs.

And note David Booth of DFA is in the same "bracket" as Asness--just because someone has become wealthy doesn't make them a snake oil salesmen.The people at AQR are as far from that as are the people at DFA. If you know both you would find it very hard to differentiate the two in what they do in implementing strategies.

And saying their research is unsound and erroneous IMO is really showing lack of knowledge. In fact some of their papers have won prestigious awards such as the best paper of the year from the Journal of Portfolio Management. And their academics are associated with some of the most prestigious institutions , and not just academic ones.

Note that just like DFA they don't work with retail public, so they are not as transparent to the average retail investor, but they are totally transparent to the institutions they serve and to the advisor community they work with.

What's really sad is that you have people doing character assassinations when they don't even have real knowledge about the person or organization, just uninformed opinions. And they do so in cowardly fashion, hiding behind an anonymous name. If going to do such things you should at least have the courage to have your name behind the statement.

Hope the above is helpful
larry

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Re: Cliff Asness: Liquid Alt Ragnarok?

Post by Elysium » Wed Sep 12, 2018 8:43 am

larryswedroe wrote:
Wed Sep 12, 2018 7:58 am
Just to correct the misstatements
I will not trust investing with someone who is being very opaque about that they do, other than point to erroneos or unsound academic research.
AQR is just as transparent as DFA. They are fully transparent providing in depth attribution analysis on regular basis.
They also rely totally on academic research and they don't do any active management in the Fama sense of the word, no individual security selection and no market timing (other than where using managed futures using a systematic trend following system). DFA even says they are active, but they use it in the same sense I do, that they are active in defining their universe of eligible securities, not in security selection. It's sad when you see people twist words to meet their preconceived notions.

I've also had the privilege of meeting with Asness and having dinner with him and he is incredibly nice and funny and humble guy who has built a great team of academics, think 73 PHDs, who are all transparent in their research and implementation.

We've even been in their trading rooms to watch how the algo programs work to minimize costs.

And note David Booth of DFA is in the same "bracket" as Asness--just because someone has become wealthy doesn't make them a snake oil salesmen.The people at AQR are as far from that as are the people at DFA. If you know both you would find it very hard to differentiate the two in what they do in implementing strategies.

And saying their research is unsound and erroneous IMO is really showing lack of knowledge. In fact some of their papers have won prestigious awards such as the best paper of the year from the Journal of Portfolio Management. And their academics are associated with some of the most prestigious institutions , and not just academic ones.

Note that just like DFA they don't work with retail public, so they are not as transparent to the average retail investor, but they are totally transparent to the institutions they serve and to the advisor community they work with.

What's really sad is that you have people doing character assassinations when they don't even have real knowledge about the person or organization, just uninformed opinions. And they do so in cowardly fashion, hiding behind an anonymous name. If going to do such things you should at least have the courage to have your name behind the statement.

Hope the above is helpful
larry
With all due respect, mathematical models based on academic research and theories devised by well qualified army of PhDs also gave us the sub-prime lending crisis that led to near financial collapse. You may call it ill informed and what not, however, I had the discussion with an Ivy League economist relative back in early 2000 about bubble in housing, and I was told by this person (who incidentally was a junior to Fama at one point at Chicago) that there is no housing bubble at a national level and they will not collapse at a national level, and that many learned academics just disagree with me. I kept my mouth shut since they have the Ivy league economic degree to smack me on the head with, but we know what happened few years later. Anyway, point is, just because someone claims more qualifications doesn't mean that others are all ill informed. We all get to make our own decisions after reading all the evidence. In anycase, none of this is an exact science. As Taylor says, many roads to Dublin.

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Re: Cliff Asness: Liquid Alt Ragnarok?

Post by Elysium » Wed Sep 12, 2018 8:57 am

Btw, just want to add that, for all the researcch and models that AQR is employing, there is someone equally smart at the other end following a different strategy. This is all anecdotal, I reccently had a conversation with an investment manager who works for a firm managing about 140 billion in defined contributions, and they were skeptical of AQR methodology. He said there is no evidence of it working well and backtesting cannot be relied upon. So, there are many skeptics in academia and in the industry, on the other side of the coin. I am not betting on a strategy that doesn't have wide acceptance, some may. To each their own.

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Re: Cliff Asness: Liquid Alt Ragnarok?

Post by larryswedroe » Wed Sep 12, 2018 9:14 am

With all due respect, mathematical models based on academic research and theories devised by well qualified army of PhDs also gave us the sub-prime lending crisis that led to near financial collapse.
This statement is so wrong it shows totally a lack of knowledge of the situation. The collapse literally had nothing to do with any models or theories. NOTHING. And I know well as I was vice chairman of one of the largest mortgage companies in the country. It had everything to do with
a) government policy pushing "affordable housing" which kept lowering the standards for which loans could be made, including the CRA.
b) frauds
c) total failure of state and local regulators in the mortgage industry to actually do their jobs and prevent the frauds
D) massive over leveraging by financial institutions and dumb regulations which favored housing loans for bank capital standards (see A).

Now disagreeing with their approach is fine, but character assassination and making totally incorrect statements just is wrong, At least have facts correct

BTW, same statement you make about AQR applies to DFA, in every way (like someone smart on other side of trade--fact is that is also not a correct statement as retail investors tend to be more on other side of the trades as they overweight the stocks that DFA and AQR underweight/ignore.
Larry

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Re: Cliff Asness: Liquid Alt Ragnarok?

Post by nedsaid » Wed Sep 12, 2018 9:34 am

larryswedroe wrote:
Wed Sep 12, 2018 9:14 am
The collapse literally had nothing to do with any models or theories. NOTHING. And I know well as I was vice chairman of one of the largest mortgage companies in the country. It had everything to do with
a) government policy pushing "affordable housing" which kept lowering the standards for which loans could be made, including the CRA.
b) frauds
c) total failure of state and local regulators in the mortgage industry to actually do their jobs and prevent the frauds
D) massive over leveraging by financial institutions and dumb regulations which favored housing loans for bank capital standards (see A).
Hi Larry:

In agreement with point a. This was a big story that was not told much in the media. This thing had its roots in the Community Reinvestment Act from the 1970's. The intent was to eliminate "red lining" were banks literally would not lend to anyone in certain neighborhoods. The idea was to eliminate discrimination. A well intentioned idea that went way, way too far. We forgot that people actually have to be able to repay loans.

I favor level playing fields and non-discrimination in lending practices. Legislation in this area was needed but as we know from numerous experiences, more and more and more of a good thing often doesn't work out. There gets to be a point of diminishing returns.

The factors that you cite above were big reasons that Warren Buffett sold his large investments in Freddie Mac. He never said why other than vague comments about risk. I owned Fannie Mae stock, I just couldn't see how they could keep growing their business. Do remember reading their annual reports where Franklin Raines, the CEO made comments regarding affordable housing and the like. It was getting clear their lending standards were declining. I didn't really know too much about the additional risks they were taking, just figured they were already pretty big, didn't see where the growth was coming from, and that Buffett knew things I didn't. So I sold at a good profit, before all this collapsed.
A fool and his money are good for business.

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Re: Cliff Asness: Liquid Alt Ragnarok?

Post by Elysium » Wed Sep 12, 2018 9:46 am

larryswedroe wrote:
Wed Sep 12, 2018 9:14 am
With all due respect, mathematical models based on academic research and theories devised by well qualified army of PhDs also gave us the sub-prime lending crisis that led to near financial collapse.
This statement is so wrong it shows totally a lack of knowledge of the situation. The collapse literally had nothing to do with any models or theories. NOTHING. And I know well as I was vice chairman of one of the largest mortgage companies in the country. It had everything to do with
a) government policy pushing "affordable housing" which kept lowering the standards for which loans could be made, including the CRA.
b) frauds
c) total failure of state and local regulators in the mortgage industry to actually do their jobs and prevent the frauds
D) massive over leveraging by financial institutions and dumb regulations which favored housing loans for bank capital standards (see A).

Now disagreeing with their approach is fine, but character assassination and making totally incorrect statements just is wrong, At least have facts correct

BTW, same statement you make about AQR applies to DFA, in every way (like someone smart on other side of trade--fact is that is also not a correct statement as retail investors tend to be more on other side of the trades as they overweight the stocks that DFA and AQR underweight/ignore.
Larry
I stand by my original statement. All of those points a-d did play a role, however, the financial mortgage lending institutions employed mathematical models that predicted credit risk to fall within a certain acceptable default rates. In other words, the models did not acccount for housing prices to drop below a certain level, and never at a national level. If they did, then they would have known the lending practices weren't sustainable, and so they could have corrected such practices. The fact is models were skewed to produce a certain expected result. I know this as I was an engineer who worked at one of the housing giants that fell and went under conservatorship. I have friends who worked on the models hands-on. Perhaps you were too high up as a vice chairman to know what was happening on the ground :twisted:

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Re: Cliff Asness: Liquid Alt Ragnarok?

Post by nedsaid » Wed Sep 12, 2018 10:07 am

Elysium wrote:
Wed Sep 12, 2018 9:46 am
larryswedroe wrote:
Wed Sep 12, 2018 9:14 am
With all due respect, mathematical models based on academic research and theories devised by well qualified army of PhDs also gave us the sub-prime lending crisis that led to near financial collapse.
This statement is so wrong it shows totally a lack of knowledge of the situation. The collapse literally had nothing to do with any models or theories. NOTHING. And I know well as I was vice chairman of one of the largest mortgage companies in the country. It had everything to do with
a) government policy pushing "affordable housing" which kept lowering the standards for which loans could be made, including the CRA.
b) frauds
c) total failure of state and local regulators in the mortgage industry to actually do their jobs and prevent the frauds
D) massive over leveraging by financial institutions and dumb regulations which favored housing loans for bank capital standards (see A).

Now disagreeing with their approach is fine, but character assassination and making totally incorrect statements just is wrong, At least have facts correct

BTW, same statement you make about AQR applies to DFA, in every way (like someone smart on other side of trade--fact is that is also not a correct statement as retail investors tend to be more on other side of the trades as they overweight the stocks that DFA and AQR underweight/ignore.
Larry
I stand by my original statement. All of those points a-d did play a role, however, the financial mortgage lending institutions employed mathematical models that predicted credit risk to fall within a certain acceptable default rates. In other words, the models did not acccount for housing prices to drop below a certain level, and never at a national level. If they did, then they would have known the lending practices weren't sustainable, and so they could have corrected such practices. The fact is models were skewed to produce a certain expected result. I know this as I was an engineer who worked at one of the housing giants that fell and went under conservatorship. I have friends who worked on the models hands-on. Perhaps you were too high up as a vice chairman to know what was happening on the ground :twisted:
Well, Warren Buffet knew and he sold. Being CEO of a conglomerate is higher on the totem pole than a Vice President.

AIG might be a good example of what you are talking about. They took risks playing the credit default swaps. I read a lengthy article on this and the sense I got that the first team that did this knew what they were doing, the second team that took their place only thought they knew what they were doing. Whatever models they were using to determine risk didn't work.

I think what happened was a product of group think. Beliefs get so widely accepted that people ignored what was plain for everyone to see. Beliefs affect perception. I didn't know the real estate crash was going to happen, I got an uneasy feeling when I saw prices so high and wondering what could sustain all of this. Saw people getting into homes that I wondered how they could afford the payments, just figured it wasn't any of my business. Then a co-worker got really interested in real estate investing.

Same as the uneasy feeling I got in the very late 1990's when I saw the day trading and people who had never investing before getting interested in the stock market. There was a time when it seemed like the NASDAQ went up 100 points a day. Didn't know things were going to crash but I didn't feel good about it.
A fool and his money are good for business.

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Re: Cliff Asness: Liquid Alt Ragnarok?

Post by larryswedroe » Wed Sep 12, 2018 10:27 am

re the models and theory. Models are only as good as the theory behind them. If people used models based on garbage theory then the models are wrong. There was literally NO ACADEMIC THEORY behind the crisis or the models, Just some people's opinions. Thus comparing the use of false models based on bad assumptions with no theory to back them up, nor any data, is just wrong. And the fact is that non of it would have happened if regulators did their jobs and banks and other financial institutions didn't over leverage and SEC allowed it!! What is missing from the story is also the publicazation of private investment banks. Before going public they tended to leverage like 3 or 4 to 1 and never double digits. The SEC has oversight over this and allowed some to lever like 30:1 and thus you had the failures.

I am well aware of all the models and stuff and it all was nonsense, just used to justify short term profits the banks got from originating and selling off the product. No science at all behind them, not even logic.

So that story is just false in terms of an analogy that could be used related to anything that AQR or DFA does. It's literally absurd to make such a claim.

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Re: Cliff Asness: Liquid Alt Ragnarok?

Post by Elysium » Wed Sep 12, 2018 10:37 am

nedsaid wrote:
Wed Sep 12, 2018 10:07 am
Elysium wrote:
Wed Sep 12, 2018 9:46 am
larryswedroe wrote:
Wed Sep 12, 2018 9:14 am
With all due respect, mathematical models based on academic research and theories devised by well qualified army of PhDs also gave us the sub-prime lending crisis that led to near financial collapse.
This statement is so wrong it shows totally a lack of knowledge of the situation. The collapse literally had nothing to do with any models or theories. NOTHING. And I know well as I was vice chairman of one of the largest mortgage companies in the country. It had everything to do with
a) government policy pushing "affordable housing" which kept lowering the standards for which loans could be made, including the CRA.
b) frauds
c) total failure of state and local regulators in the mortgage industry to actually do their jobs and prevent the frauds
D) massive over leveraging by financial institutions and dumb regulations which favored housing loans for bank capital standards (see A).

Now disagreeing with their approach is fine, but character assassination and making totally incorrect statements just is wrong, At least have facts correct

BTW, same statement you make about AQR applies to DFA, in every way (like someone smart on other side of trade--fact is that is also not a correct statement as retail investors tend to be more on other side of the trades as they overweight the stocks that DFA and AQR underweight/ignore.
Larry
I stand by my original statement. All of those points a-d did play a role, however, the financial mortgage lending institutions employed mathematical models that predicted credit risk to fall within a certain acceptable default rates. In other words, the models did not acccount for housing prices to drop below a certain level, and never at a national level. If they did, then they would have known the lending practices weren't sustainable, and so they could have corrected such practices. The fact is models were skewed to produce a certain expected result. I know this as I was an engineer who worked at one of the housing giants that fell and went under conservatorship. I have friends who worked on the models hands-on. Perhaps you were too high up as a vice chairman to know what was happening on the ground :twisted:
Well, Warren Buffet knew and he sold. Being CEO of a conglomerate is higher on the totem pole than a Vice President.

AIG might be a good example of what you are talking about. They took risks playing the credit default swaps. I read a lengthy article on this and the sense I got that the first team that did this knew what they were doing, the second team that took their place only thought they knew what they were doing. Whatever models they were using to determine risk didn't work.

I think what happened was a product of group think. Beliefs get so widely accepted that people ignored what was plain for everyone to see. Beliefs affect perception. I didn't know the real estate crash was going to happen, I got an uneasy feeling when I saw prices so high and wondering what could sustain all of this. Saw people getting into homes that I wondered how they could afford the payments, just figured it wasn't any of my business. Then a co-worker got really interested in real estate investing.

Same as the uneasy feeling I got in the very late 1990's when I saw the day trading and people who had never investing before getting interested in the stock market. There was a time when it seemed like the NASDAQ went up 100 points a day. Didn't know things were going to crash but I didn't feel good about it.
Right, of course there are warning signs, but policy makers tend to ignore many of those things in favor of alternatives that they believe are good for the short term gains. My point is, just because someone has a PhD in Economics from an Ivy institution or they employ mathematical models based on academic research doesn't mean they are fool proof. On the contrary, the models are only as good as the assumptions they make and the inputs they are given. I know first hand about the credit risk models they were employed by the mortgage giants, and they were skewed towards a certain expected result, for instance something like up to 10% drop in prices and we are still fine, and the likelyhood of anything beyond at a national level isn't possible because such as scenario never happend as is unlikely.

Lending practices are what led to the crisis, however the lending practices were enabled by the models they run in the trading rooms. It gave legitimacy to the practice. No CEO simply comes up with a practice to give more sub-prime loans without some numbers to back it up.

On a different issue, I was in the room with a Senior VP presenting a summary of risk analysis (not financial risk but data privacy related), and after listening to the summary I put together, he looked me in the eye and said this is all good, I know what needs to be done to mitigate this risk, however this is not a front page risk for me, and I would rather pay a small fine if it ever were to happen and get away with rather than spend the cost for the infrastructure needed to prevent it from happening. I was left speechless, and my immediate boss who was with me in the room agreed with it, congratulated on the good work and to carry on with other business.

So, in the end, models are neither good or bad, they are only as good as we make them to be. Are the models employed by AQR fool proof, do they consider several market scenarios under which they could totally fail, or do they make reasonable adjustments in their mind in order to make it work the way they can conduct business. These are all good questions to ask before you invest.
Last edited by Elysium on Wed Sep 12, 2018 10:43 am, edited 1 time in total.

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Re: Cliff Asness: Liquid Alt Ragnarok?

Post by Theoretical » Wed Sep 12, 2018 10:41 am

Something I try to look for is funds using these techniques that are not run by the companies promoting the strategy via papers. Part of a strategy’s robustness is based on whether a different metric or metrics successfully accessed the premium or factor. For example, price to sales instead of price to book. Both work just fine.

So I use IJS instead of a DFA fund. I might also use PXSV or RZV or the Vanguard factor fund.

Internationally, I use PDN, FNDC, and DLS

Emerging I use FNDE.

For managed futures, I use 3 CTA mutual funds, none of which are AQR. - Equinox Chesapeake, Natixis ASG, and Arrow Funds (Dunn WMA).

I’m not averse to AQR or DFA products, but I think it’s important to lean on one company for advice and research and another for fund selections.

It takes a lot to find, but I think it helps avoid getting into a data mined fund if you evaluate your choices relative to a different company’s academic paper and models/factors.

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Re: Cliff Asness: Liquid Alt Ragnarok?

Post by Elysium » Wed Sep 12, 2018 10:49 am

larryswedroe wrote:
Wed Sep 12, 2018 10:27 am
re the models and theory. Models are only as good as the theory behind them. If people used models based on garbage theory then the models are wrong. There was literally NO ACADEMIC THEORY behind the crisis or the models, Just some people's opinions. Thus comparing the use of false models based on bad assumptions with no theory to back them up, nor any data, is just wrong. And the fact is that non of it would have happened if regulators did their jobs and banks and other financial institutions didn't over leverage and SEC allowed it!! What is missing from the story is also the publicazation of private investment banks. Before going public they tended to leverage like 3 or 4 to 1 and never double digits. The SEC has oversight over this and allowed some to lever like 30:1 and thus you had the failures.

I am well aware of all the models and stuff and it all was nonsense, just used to justify short term profits the banks got from originating and selling off the product. No science at all behind them, not even logic.

So that story is just false in terms of an analogy that could be used related to anything that AQR or DFA does. It's literally absurd to make such a claim.
Obviously they are not the same situation between lending crisis and the models employed vs. the models employed by AQR. However, the point remains all models have some basic assumptions they take into consideration. What you are suggesting is that AQR is different, and theirs is based on sound theory. I am skeptical until proven wrong with evidence of long enough performance history under different market scenarios. It's just a large leap of faith to say, here trust us, we got this right and all the others are wrong.

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Re: Cliff Asness: Liquid Alt Ragnarok?

Post by vineviz » Wed Sep 12, 2018 11:20 am

Elysium wrote:
Wed Sep 12, 2018 10:49 am
Obviously they are not the same situation between lending crisis and the models employed vs. the models employed by AQR. However, the point remains all models have some basic assumptions they take into consideration. What you are suggesting is that AQR is different, and theirs is based on sound theory. I am skeptical until proven wrong with evidence of long enough performance history under different market scenarios. It's just a large leap of faith to say, here trust us, we got this right and all the others are wrong.
You are certainly entitled to your skepticism, but skepticism alone doesn't obviate the facts as they exist.

The research used and/or published by firms like AQR, DFA, and Vanguard is rigorous in every conceivable way. Informed skepticism is fine, but attacks along the lines of "anything I don't understand is wrong until I understand it" don't really advance the discussion.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Cliff Asness: Liquid Alt Ragnarok?

Post by Elysium » Wed Sep 12, 2018 11:33 am

vineviz wrote:
Wed Sep 12, 2018 11:20 am
Elysium wrote:
Wed Sep 12, 2018 10:49 am
Obviously they are not the same situation between lending crisis and the models employed vs. the models employed by AQR. However, the point remains all models have some basic assumptions they take into consideration. What you are suggesting is that AQR is different, and theirs is based on sound theory. I am skeptical until proven wrong with evidence of long enough performance history under different market scenarios. It's just a large leap of faith to say, here trust us, we got this right and all the others are wrong.
You are certainly entitled to your skepticism, but skepticism alone doesn't obviate the facts as they exist.

The research used and/or published by firms like AQR, DFA, and Vanguard is rigorous in every conceivable way. Informed skepticism is fine, but attacks along the lines of "anything I don't understand is wrong until I understand it" don't really advance the discussion.
This is a complete misstatement of what I have said. You just lumped AQR, DFA, and Vanguard on the same boat, as if they are all promoting the same research, they are not. I am not questioning DFA or Vanguard in this thread, but the strategy employed by AQR, so let's stick to that point. Second, there is no attack here, so I don't know what you are talking about. I am not the one who called Cliff Asness a snakeoil salesman, I simply responded by stating I just don't equate someone like him to Bogle.

Let's stick to the merits of the discussion. Do you fully understand and agree with the models and assumptions AQR employs for their strategies, and if so can you point to the evidence such strategies perform well under different market cycles, other than backtesting.

Edit: Btw, if you are referring to disagreeing with Larry's view as an attack on him, I beg to differ. Disagreement on civil terms is not an attack. I am well aware of his contributions on this forum and on M* forum before that dating back to the early years, and I own a copy of his early books (The only winning investment guide...) I am not one of those who have attacked him or anyone personally, you can go back and check history. I just don't think he has been right on the alts, and that is where the disagreement is.

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Re: Cliff Asness: Liquid Alt Ragnarok?

Post by larryswedroe » Wed Sep 12, 2018 12:20 pm

Obviously they are not the same situation between lending crisis and the models employed vs. the models employed by AQR. However, the point remains all models have some basic assumptions they take into consideration. What you are suggesting is that AQR is different, and theirs is based on sound theory. I am skeptical until proven wrong with evidence of long enough performance history under different market scenarios. It's just a large leap of faith to say, here trust us, we got this right and all the others are wrong.
Yes that is true. But there is absolutely rigorous research and logic and evidence and plenty of data to support their strategies. It's all well documented and even presented in my book Your Complete Guide to Factor Based Investing, where each factor is tested for persistence, pervasiveness, robustness, implementability and intuitiveness. In every case. Now if you are not aware of all the evidence that's one thing. You can also disagree with the conclusions. That's fine too. But saying AQR are snake oil salesmen is an attack without justification and IMO if going to do so one should at least have courage to put their name behind it, not hide anonymously.

Note I only use two AQR funds in my personal accounts for myself and family, QSPRX for tax advantaged and QRPRX for taxable. So I don't have much if any stake in that game. Just trying to get the facts right. And hate seeing character assassinations especially by those without knowledge sufficient to make the claim.

I would also note re the crisis and models. What is missing in the accusations is a failure to consider that the models were all created due to bad incentives, not models based on any research nor any logic whatsoever. So if one was an engineer using or designing them they are "guilty" in my book.
The incentives were first by the politicians re pushing more affordable housing. Then originators who made money no matter what the risks or credit were, or interest rate risks. They underwrote to the standards set by Fannie and Freddie and VA who were persistently pushed to make terms looser. And then of course there were massive frauds on appraisals (that the regulators failed to even address even though everyone knew it was going on and it was there JOB to catch it), that were incented by the fees of originators. And then the investment banks had incentives to buy and package the stuff and sell. And even rating agencies (their is agency risk in the stupidity of the whole system where the originators pay for the rating not the investors--that alone would have prevented most of the crisis) who made more money as they approved what was junk and found ways to call it AAA or AA. Part of that is they were hired by the investment banks eventually because they knew how to work the system. So the whole thing was set off by models that were created to justify profits that had no logic behind the models, no theory, just greed. That's the story pure and simple. Not failure of models, but failure of regulators to do their jobs and bad incentives. Blaming the crisis on models and theory shows IMO a total lack of understanding of the issues. And of course literally has nothing to do with anything that DFA, Vanguard and AQR do. And btw, all three do the same type research and create now similar products, and I know as I meet with the heads of research from all three. And as you know, Vanguard now even has multifactor models, just like DFA and AQR.

Best wishes
Larry

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