Vanguard Market Neutral Fund

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Tramper Al
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Vanguard Market Neutral Fund

Post by Tramper Al » Mon Dec 03, 2007 10:03 am

The Vanguard Market Neutral Fund (formerly of Laudus Rosenberg) is apparently up and running.

It does have a minimum initial investment (and balance) of $250K, as was previously accounced. It looks like assets were around $13M (as Laudus) back at the end of September, so there cannot be too many qualifying accounts to begin with.

There is language in the prospectus indicating that shareholders at conversion are not subjected to this minimum. I also noticed the ER is 0.50 for the investor class shares, though I believe this was previously going to be 0.75. Perhaps a temporary waiver is in effect. That ER does not include the dividend expenses on short sales necessitated by the fund's structure/mission. Total expenses seem to be 3.46!

I am interested to see how this fits for Vanguard, and I do have a foot in the door position.

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Post by stratton » Mon Dec 03, 2007 10:48 am

Imagine giving a gift to Mr. Bogle at the next Diehards get together and in the box:

-Prospectus for this fund
-Throwable foam blocks
-Photo of John Brennan

:twisted:

Paul

PS I actually think that if Vanguard is going to get into "hedge" funds this market neutral style fits their conservative style.

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Wellesley is a fine Mkt Neutral Fund

Post by stratton » Mon Dec 03, 2007 11:03 am

Even with Vanguard's low fees this fund is still expensive. The comparison for this fund ought to be Hussman Strategic Growth (HSGFX) since both of them appear to have t-bills as there bogey.

I feel Vanguard already has a Market Neutral Fund that also makes a good proxy for junk bonds and its a lot less riskier and with an ER of 0.25%.

Wellesley.

If you add Wellesley to this chart you can see Wellesley does a reasonable job of beating the pants off the Market Neutral Fund with less expenses, less volatility, less managerial risk and no possibility of crank phone calls from diehards. :lol:

Paul

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Post by Adrian Nenu » Mon Dec 03, 2007 11:11 am

If Jack Bogle was still in charge, Vanguard would not offer this fund.

Adrian
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Post by nisiprius » Mon Dec 03, 2007 1:15 pm

???? An expense ratio of THREE... point... four... six percent? (Blinks and looks again) That three does come before the decimal point, not after it, right?

And the idea is that
The Fund’s long/short market neutral investment strategy is an absolute-return investment approach seeking performance that exceeds the returns of 3-month U.S. Treasury bills.
although, with commendable candor, they go on to say that
An investment in the Fund, however, is different from an investment in 3-month U.S. Treasury bills because, among other things, Treasury bills are backed by the full faith and credit of the U.S. Government, Treasury bills have a fixed rate of return, investors in Treasury bills do not risk losing their investment, and an investment in the Fund is expected to be substantially more volatile than an investment in Treasury bills.
So, look... if I had $250,000 of "mad money," in my greedy dreams by how much would I be avariciously fantasizing that the returns would exceed those of 3-month Treasury bills? (And just think: it has to beat the treasury bills after 3.46% is raked off the top, right?)
The Fund uses multiple investment advisors, each of which independently selects and maintains a diversified portfolio of equity securities for the Fund. Each advisor buys equity securities it considers to be undervalued and sells short an approximately equal dollar amount of securities the advisor considers to be overvalued.
These stocks are picked at the peak of perfection, and you know they're good because Vanguard has a crack team of expert stock-pickers.

If an index fund is passively managed, and if a fund that picks stocks is actively managed, then what is a fund that picks stocks to buy and short? Hyperactively managed?

I see there is performance data going back not quite ten years... I've been staring at the "hypothetical growth of $10,000" curve and overlaying various things on it, Total Bond Market, Inflation Protected Security, LifeStrategies Income, even Short-Term Federal, trying to understand what the point of this fund is.

I think I'll start my own fund... it will be the Nisiprius Volatile T-Bill Fund. It will invest in short-term Treasuries, and the way it will work is, at the end of every month I'll flip a coin, and if it comes up heads I'll take a chunk of money out of the fund and hide it temporarily, and if it comes up tails I'll put the money back. I'm willing to do that for a lot less than 3.46%.
Last edited by nisiprius on Mon Dec 03, 2007 1:45 pm, edited 2 times in total.

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Post by Tramper Al » Mon Dec 03, 2007 1:40 pm

nisiprius wrote: If an index fund is passively managed, and if a fund that picks stocks is actively managed, then what is a fund that picks stocks to buy and short? Hyperactively managed?
Well, yes. You are getting a double dose of manager talent here, whether that exists or not. The returns will live and die by stock picking, hence the "market neutral" bit. Too bad it's just as hard to pick the 10 worst (future) performing stocks as it is the 10 best.

The 3+% dividend expense, you surely realize, is the product of the premise rather than the execution. This is the cost of doing business when that business is selling short, yes? It would still be there if the longs/shorts were selected by a rules-based formula at no cost.

I agree with the bit about crank phone calls. I'll just say that it was Vanguard's idea to offer this fund, not mine. If it does not sit well with your Diehard philosophy, and how could it, please call them.
Last edited by Tramper Al on Mon Dec 03, 2007 1:44 pm, edited 1 time in total.

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Post by nisiprius » Mon Dec 03, 2007 1:43 pm

Tramper Al wrote:
nisiprius wrote: If an index fund is passively managed, and if a fund that picks stocks is actively managed, then what is a fund that picks stocks to buy and short? Hyperactively managed?
Well, yes. You are getting a double dose of manager talent here, whether that exists or not.
But shouldn't I be getting some, you know, reward for that risk?

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Post by Sunny Sarkar » Mon Dec 03, 2007 1:47 pm

nisiprius wrote:
Tramper Al wrote:
nisiprius wrote: If an index fund is passively managed, and if a fund that picks stocks is actively managed, then what is a fund that picks stocks to buy and short? Hyperactively managed?
Well, yes. You are getting a double dose of manager talent here, whether that exists or not.
But shouldn't I be getting some, you know, reward for that risk?
Not all risks are compensated. Bad luck!

or else I could come up with all kinds of crazy stuff I can do with my money and demand a reward from Mr. Market for taking those nutty risks :)

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Post by Tramper Al » Mon Dec 03, 2007 1:54 pm

nisiprius wrote: But shouldn't I be getting some, you know, reward for that risk?
Well, sure, but I think it remains to be seen whether there will be some tangible reward under Vanguard management. This is day 1, after all.

Now, you may see no reward in the future because alpha and successful stock picking do not exist. A not unreasonable assertion, surely.

But what risk? Is it any more likely that the managers will choose the 10 worst stocks to go long than it is they'll chose the 10 best? You won't have to watch NBR to see if the market is up or down since the fund structure should neutralize all that. So your risk is basically expenses and the possibility of negative alpha.

And think of the diversification benefits . . .

Funny money. Maybe you guys can talk me out of leaving my foot in the door.

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Post by CyberBob » Mon Dec 03, 2007 2:49 pm

Adrian Nenu wrote:If Jack Bogle was still in charge, Vanguard would not offer this fund.
Yeah, what's the purpose of this fund?

I understand that it holds stocks in both long and short positions to try and temper stock volatility. But it shows a benchmark of 90-day T-bills. Well, if I can just buy the 90-day T-bills -- which don't have stock market volatility either -- why would I want this fund? Just because of its potential to beat the T-bills? Isn't that what my regular long stock holdings are for - growth potential? And my regular bonds - to temper stock market volatility?

Bob

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Post by mas » Mon Dec 03, 2007 3:05 pm

CyberBob wrote:I don't get it...what's the purpose of this fund?
What, you don't believe in the Alpha fairy?

http://www.smartmoney.com/fp/index.cfm? ... 05-neutral
Financial research shows that adding the right market-neutral fund to a portfolio of stock and bond funds can improve risk-adjusted rates of return. A study by Dulari Pancholi, a research associate at the Isenberg School of Management at the University of Massachusetts, Amherst, found that, on average, market-neutral funds improved a portfolio's risk and return relationship.
Which one is right?

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Post by Tramper Al » Mon Dec 03, 2007 3:24 pm

mas wrote: Which one is right?
Hopefully, the cheap one!

We're up around 5% in about 2 months since purchase under the old management vs. <1% for SHV, so that surely proves something - definitively.

With that $250K minimum investment, Vanguard is clearly going for institutional investors, as it has for years with the institutional share class. They must have some reason to think that they are mssing out in this niche.

There is a component of hedge fund envy, of course, but at a bargain basement (seriously) price.
Last edited by Tramper Al on Mon Dec 03, 2007 3:26 pm, edited 1 time in total.

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Post by nisiprius » Mon Dec 03, 2007 3:24 pm

mas wrote:
CyberBob wrote:I don't get it...what's the purpose of this fund?
What, you don't believe in the Alpha fairy?

http://www.smartmoney.com/fp/index.cfm? ... 05-neutral
Financial research shows that adding the right market-neutral fund to a portfolio of stock and bond funds can improve risk-adjusted rates of return. A study by Dulari Pancholi, a research associate at the Isenberg School of Management at the University of Massachusetts, Amherst, found that, on average, market-neutral funds improved a portfolio's risk and return relationship.
Which one is right?
"The big problem: They are not all alike. Some funds sport low correlations to the S&P 500, and have delivered consistent returns over the past three and five years. Other funds, at times, may be highly leveraged, and make big bets — either by making long or short sales or by sector. As a result, these funds can register equity-like gains or losses."

Indeed, you need to pick the right market-neutral fund. But if you can't do that, then you need to find an expert market-neutral-fund-picker. But if you're not sure you can pick an expert market-neutral-fund-picker, then you need an expert market-neutral-fund-picker-picker.

Or perhaps the answer is a market-neutral fund-of-funds that invests in market-neutral funds, with expert market-neutral-fund-pickers adjusting the allocation of the market-neutral-funds in the fund. Or perhaps Vanguard should introduce a market-neutral-fund-index-fund that passively invests in all of the market-neutral funds.

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Post by Tramper Al » Mon Dec 03, 2007 3:51 pm


Yeah, I remember that article too. Did you see where they quote an author/advisor from Michigan who suggested hedge funds (for acredited investors) instead? That's pretty damning criticism, surely.

I'm not sure how good this business is, either. Laudus had three L/S funds when that article is written. One has folded and another gone to Vanguard, so they may have just one left.

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Post by stratton » Mon Dec 03, 2007 3:58 pm

nisiprius wrote:Indeed, you need to pick the right market-neutral fund. But if you can't do that, then you need to find an expert market-neutral-fund-picker. But if you're not sure you can pick an expert market-neutral-fund-picker, then you need an expert market-neutral-fund-picker-picker.
If you compare the funds previous performance under Laudus-Rosenberg vs. the Hussman Strategic Growth it's no contest. Hussman won on ER and performance. The Hussman fund had abysmal number during a nice bull market, but 15 and 16% jumps during the bear market and nice total returns for 2007. With Vanguard cutting the ER a bit they have a chance of getting closer to the Hussman fund returns.

You can get the same approximate long term performance with similar behavor and a lot less ER by using Wellesley.

Paul

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Post by Tramper Al » Mon Dec 03, 2007 4:18 pm

stratton wrote: If you compare the funds previous performance under Laudus-Rosenberg vs. the Hussman Strategic Growth it's no contest.

You can get the same approximate long term performance with similar behavor and a lot less ER by using Wellesley.
Unless I am mistaken, does not the Hussman fund have a great deal of long-short latitude, that is does not have a strict market-neutral 50% long 50% short zero beta mandate? If so I would not consider that comparable. I want my market neutral fund to live and die on stock picking, not on guesses as to overall market direction. This gives me a better complement to the rest of my (overwhelmingly long equity) portfolio.

I certainly would not go about this by looking for a (Wellington) chart with performance characteristics that seemed to fit that of a good market neutral fund. That's a balanced (stock/bond) fund, for crying out loud. I wouldn't even know where to locate such a thing, and I own its components elsewhere anyway.

As a picker of market-neutral funds parodied above, I'm not really in the business of looking at past returns anyway, except to see if a fund has behaved as expected. I look for a strong market neutral structure, the endorsement of a fund company like Vanguard, and low low (for the mission) expenses.

I predict over the next couple of years we'll definitely see a crop of new, low cost ETFs with market neutral properties vying for investors' low-correlation dollars. Or else we'll see the Vanguard Market Neutral fund fold and go away, for poor performance and general lack of interest. Whichever.

And yes, I agree that 3 month T-Bills would be an excellent choice holding in this class. Simple, dirt cheap and effective.

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Post by stratton » Mon Dec 03, 2007 4:35 pm

Tramper Al wrote:Unless I am mistaken, does not the Hussman fund have a great deal of long-short latitude, that is does not have a strict market-neutral 50% long 50% short zero beta mandate? If so I would not consider that comparable. I want my market neutral fund to live and die on stock picking, not on guesses as to overall market direction. This gives me a better complement to the rest of my (overwhelmingly long equity) portfolio.
You're assuming market neutral funds are 50% long and 50% short and thats probably not a good assumption. The Hussman fund definitely shifts around, but tries to maintain close to 0 beta and 0 correlation with the TSM. The former Laudus-Rosenberg fund appeared to try the same thing with its correlation and beta.
I certainly would not go about this by looking for a (Wellington) chart with performance characteristics that seemed to fit that of a good market neutral fund. That's a balanced (stock/bond) fund, for crying out loud. I wouldn't even know where to locate such a thing, and I own its components elsewhere anyway.
Wellesley. Wellesley is 40/60 stock/bonds and management has kept the correlation to the S&P 500 down under 0.30 according to M*. Wellington is 65/35 stocks/bonds and has a much higher correlation and is not really a good comparison.

Paul

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Post by matt » Mon Dec 03, 2007 4:42 pm

Hussman Strategic Growth is not a standard long-short fund. It can vary its equity exposure from 0%-150% by using derivatives. It only shorts indexes, not individual stocks like a typical long-short fund.

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Post by mas » Mon Dec 03, 2007 4:46 pm

Tramper Al wrote:With that $250K minimum investment, Vanguard is clearly going for institutional investors, as it has for years with the institutional share class.
Don't forget that the upcoming suite of Managed Payout Funds funds will be partially invested here as well. So the "little guys" will be in there indirectly as well.

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Post by Ariel » Mon Dec 03, 2007 5:28 pm

CyberBob wrote:I understand that it holds stocks in both long and short positions to try and temper stock volatility. But it shows a benchmark of 90-day T-bills. Well, if I can just buy the 90-day T-bills -- which don't have stock market volatility either -- why would I want this fund? Just because of its potential to beat the T-bills? Isn't that what my regular long stock holdings are for - growth potential? And my regular bonds - to temper stock market volatility?
And if you want to live really dangerously, there's this fund called Vanguard Prime Money Market Fund. :shock: Not for the faint of heart, but it I give it an excellent chance of whipping those 90-day T-Bills over the long haul :lol:
Do what you will, the capital is at hazard ... - Justice Samuel Putnam (1830), as quoted by John Bogle (1994)

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Post by stratton » Mon Dec 03, 2007 8:59 pm

mas wrote:What, you don't believe in the Alpha fairy?

http://www.smartmoney.com/fp/index.cfm? ... 05-neutral
You missed a quote from someone who posts on this board:
Richard A. Ferri, CFA, author of All About Asset Allocation (McGraw Hill), avoids these funds for several reasons:

-It is difficult to find benchmarks to evaluate market-neutral fund performance.
-Fund expenses are too high. They sport annual expenses ranging from 2% to more than 3%.
-Market-neutral fund returns are inconsistent. They performed poorly during the bull market of the 1990s, and there are big differences in their year-to-year returns. market-neutral
-A mix of stocks, bonds and cash can deliver sufficient risk-adjusted rates of return.

"They do not generate enough alpha," says Ferri, a Troy, Mich.-based investment advisor with $500 million in assets under management. "It is a leap of faith to rely on a portfolio manager to long and short stocks. And the expenses are too high."

Ferri suggests that accredited investors who insist on a portfolio diversifier should consider hedge funds rather than open-end long/short mutual funds, because hedge funds have more investment flexibility and fewer investment restrictions.
Paul

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Post by Robert T » Mon Dec 03, 2007 11:01 pm

.
“Vanguard Market Neutral Fund seeks to provide long-term capital appreciation while limiting exposure to general stock market risk. The fund seeks to meet its investment objective by purchasing shares of stocks that its advisors consider undervalued and selling short an approximately equal dollar amount of stocks considered overvalued.”

From the above, my understanding is:
  • - the market return is taken out of the equation.
    - security selection is the primary source of return (a long and an equal short position allows the fund to potentially gain twice the security selection returns of a long-only manager).
    - cash return from the short sales provides a secondary return
Following Swensen’s assessment in Unconventional Success to December 2003 and adding the costs of the Vanguard fund I get the following:

Code: Select all

  
Security       Long-only    Assume the   ST interest            Total     
Selection    Excess-market   Same for    from short   Total    Return                       
Skill*           Return     Short side      sale      Return  less cost     

Top-quartile       2.3%         2.3%        4.1%       8.7%      5.4%
Median             1.2%         1.2%        4.1%       6.5%      3.2%
Third-quartile     0.0%         0.0%        4.1%       4.1%      0.8%  

* Reflects security selection skills of long-only equity managers for 10 years to 2003 (net of fees). ST interest is the 10 year average to 2003.
So even with top-quartile equity manager returns in a market neutral fund, they translate into slightly above money market rates (with much higher risk IMO).

Performance of the fund that Vanguard has now taken over since inception in 1998 = 5.28% (recent portfolio turnover is 169%).

I don't see any appealing features (quite the opposite).

Robert
.

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Post by InertiaMan » Tue Dec 04, 2007 10:31 pm

I thought that the whole point of this fund was the diversifying effect of an asset class which is uncorrelated to both bonds and the stock market.

But most of the comments in the thread seem to evaluate the attractiveness (or lack there-of) of the fund "alone" rather than its impact to a portfolio.

Isn't there substantial acedemic research (such as William Coaker's papers) which suggests that the positive impact to the portfolio might justify a fund like this, despite the admitted negative attributes of the fund itself?

If one were to agree with Coaker's papers, wouldn't this fund be one of the more attractive options to execute such a strategy?

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Post by grumel » Tue Dec 04, 2007 10:43 pm

No Outperformance after fees = no positive portfolio impact. And since there are enough academic papers that make clear that funds just are unable to do that, the entire fund gets pointless in any context.
Anyway, the very same effect could be achieved cheaper by just using normal active funds.

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Post by InertiaMan » Tue Dec 04, 2007 11:50 pm

grumel wrote:No Outperformance after fees = no positive portfolio impact.
You're saying if there is no alpha, there is no benefit. I disagree. An asset class which delivers less than market returns could still have a great portfolio impact IF the asset class is uncorrelated. That's basic MPT. Bonds are the classic example - they have lower expected returns than stocks, yet a 10/90 bond/stock portfolio outperforms a 100% stock portfolio. So with the MN fund we have an asset class with is intended to be uncorrelated to both bonds and stocks, and is likely to deliver performance (after expenses) on par with bonds, perhaps better. Seems worth considering it, rather than dismissing it.
grumel wrote:Anyway, the very same effect could be achieved cheaper by just using normal active funds.
But "normal" active funds are typically correlated with the market, so I don't see that they have anywhere near the same effect.

I stand by my original question: isn't the whole point of this type of fund to deliver better-than-bond returns while having near-zero correlation to both bonds and stocks? If others could confirm that this is the objective of the fund, then maybe we can move the debate to whether or not the fund can achieve that objective.

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Post by mudfud » Wed Dec 05, 2007 1:34 am

InertiaMan wrote:That's basic MPT. Bonds are the classic example - they have lower expected returns than stocks, yet a 10/90 bond/stock portfolio outperforms a 100% stock portfolio.

Hmmm....Didn't know that. I'd like to learn more..do you have a reference?

Mud
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Post by nisiprius » Wed Dec 05, 2007 5:38 am

InertiaMan wrote:I thought that the whole point of this fund was the diversifying effect of an asset class which is uncorrelated to both bonds and the stock market.

But most of the comments in the thread seem to evaluate the attractiveness (or lack there-of) of the fund "alone" rather than its impact to a portfolio.

Isn't there substantial acedemic research (such as William Coaker's papers) which suggests that the positive impact to the portfolio might justify a fund like this, despite the admitted negative attributes of the fund itself?

If one were to agree with Coaker's papers, wouldn't this fund be one of the more attractive options to execute such a strategy?
But, at least to a first approximation, it isn't any less correlated than 3-month T-bills, is it? Vanguard's own website doesn't seem to list betas... no time now... but how do (say) this fund, Vanguard's Inflation Protected Securities, and Prudent Bear stack up in terms of decent return and lack of correlation with the overall stock market?

If you had a fund that consistently beat the 3-month T-bills, every year, year after year, and also tended to do significantly better than T-bills in just those years when stocks underperformed, that, of course, would be great thing.

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Post by stratton » Wed Dec 05, 2007 7:25 am

InertiaMan wrote:I thought that the whole point of this fund was the diversifying effect of an asset class which is uncorrelated to both bonds and the stock market.

But most of the comments in the thread seem to evaluate the attractiveness (or lack there-of) of the fund "alone" rather than its impact to a portfolio.

Isn't there substantial acedemic research (such as William Coaker's papers) which suggests that the positive impact to the portfolio might justify a fund like this, despite the admitted negative attributes of the fund itself?

If one were to agree with Coaker's papers, wouldn't this fund be one of the more attractive options to execute such a strategy?
It depends on the data he used. I think he took synthetic data from research report. There is nothing wrong with the synthetic data, but we don't know what type of long/short fund it was modeling or averaged from.

By type of long/short fund I mean we have one type similar to the Vanguard and the Hussman fund where they try to maintain 0 beta and 0 correlation with a t-bill bogey. Then you have the other extreme where the bogey is trying to beat the S&P 500. Averaging those two types of funds together would get some pretty wierd data that doesn't resemble reality. They are essentially two different types of funds.

In this case we'd probably do better to go find the original Laudus-Rosenberg performance numbers. And those are suspect because Vanguard has cut the ER by about ~1%. Considering we're talking t-bills as our benchmark index thats a lot of return difference.

Paul

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Post by InertiaMan » Wed Dec 05, 2007 9:37 am

Article (which has been cited/discussed in many other threads here) is from Journal of Financial Planning:

http://www.fpanet.org/journal/articles/ ... 6354_1.pdf

Data used: Rob Arnott Fundamental Index, Long-Short, 1970–2004 (simulated results)

Comment from author at end of article:

The betas and correlations among longshort products vary substantially, which made using a long-short index useless as representative of an investment strategy. Hence, the author used a single long-short product (a hedged equity strategy that invests $100 long and $100 short, but which is not a marketneutral strategy because its sector weights and beta may differ from zero) in this study.

So the VG fund is similar in that it intends to be equal short & long, but of course it won't behave the same as the product used in this study. However, as I see Vanguard's intended use of the MN fund in their managed payout funds they have announced, and from the prospectus of the VG MN fund, it seems that the goal of the VG MN fund is consistent with the role which Croaker describes for long/short in a portfolio.

Bottom line, *IF* one wanted to hold such an asset class based on an expected value to the portfolio as described by Croaker, would the VG MN fund be a reasonable choice? It seems to me that it would be a reasonable choice, because it has the correct goal, it has an ER significantly lower than most/all other alternatives in the asset class, and it has Vanguard overseeing its operation.

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Post by stratton » Wed Dec 05, 2007 10:51 am

InertiaMan wrote:Bottom line, *IF* one wanted to hold such an asset class based on an expected value to the portfolio as described by Croaker, would the VG MN fund be a reasonable choice? It seems to me that it would be a reasonable choice, because it has the correct goal, it has an ER significantly lower than most/all other alternatives in the asset class, and it has Vanguard overseeing its operation.
The VG fund should have a better track just because of the 1% gain in lower fees not collected. The preliminary prospectus filed with the SEC had Laudus-Rosenberg (Schwab) and VG listed as the sub-managers. I don't know if Laudus-Rosenberg is still listed?

There is a big issue with managerial risk here. When university endowments and veteran hedgies invest they suggest limiting exposure to any one fund/manager to around 1.5% to 2%. Conversely lots of magazine articles suggest 10% into a fund like this. That's a huge risk on one manager.

There are four or five other funds with the same 0 beta, 0 correlation strategy out there and I hope Vanguard approaches all of them about being a subadvisor for this fund. The more managers the better from a risk control point of view, but performance will probably be mediocre.

I love the concept of these kind of funds, but putting the same money in a combination of TIPS, t-bills, commodiities, and/or gold might have the same/similar effect. If you look at Hussman's Strategic Total Return fund right now its: 15% gold, 60% TIPS, 20% cash or t-bills and a few miscellaneous utilities and others. It appears to be doing well.

Wellesley (VWINX) or Retirement Income (VTINX) have enough bonds they generally don't go down even in a bear market. There is enough equities to make the long term returns higher than t-bills with overall not much risk. This is just a tame version of Larry Swedroe's personal portfolio (10.5% US SV, 10.5% Intl SV, 4% EM Value, 5% commodities, lots of TIPS).

Theoretically the same money you'd put into a market neutral fund could be broken up the same way. Lots of choices here!

Paul

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Robert T
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Post by Robert T » Wed Dec 05, 2007 11:49 am

.
Expected value added to a portfolio:

It is very difficult to determine if it will have any value or not as correlations are driven by stock picking skills of the managers. If stock picking skills are inconsistent, then correlations with bonds (particularly its benchmark - T-bills) will be lower than if stock picking skills are consistent.

What’s happened over the life of the fund 1999-2006?

Correlations with TBM and 3 month T-bills have been negative – so stock picking skill has been inconsistent (with -9.9 and -7.5 percent return in 2000 and 2003 respectively which suggests that the managers stock picking under performed an index fund by this magnitude + the interest on the short sale. Note that an equal long and short position on an index should generate a zero return, although the short sales should earn ST interest –likely MM returns). [This is my understanding].

However these negative correlations have not translated into portfolio benefits. If we take the Market Neutral Fund (MNF) allocation from equities (as the benchmark is T-bills), I get the following:

Code: Select all


1999-2006
                             Annualized           Standard
                               Return             Deviation
75 TSM:25 TBM                   4.97                13.09 
75 TSM:20 TBM:5 MNF             4.94                13.07 
75 TSM:15 TBM:10 MNF            4.90                13.08  
75 TSM:5 TBM:20 MNF             4.81                13.15

Again, I don’t see any appealing features.

Robert
.

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Post by stratton » Wed Dec 05, 2007 12:15 pm

Robert T wrote:Again, I don’t see any appealing features.
Robert, thanks for the analysis. Even more convincing why I don't want it.

Lets summarize:

1. Expensive.
2. Managerial risk.
3. Doesn't appear to really do much.

Paul

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Post by Tramper Al » Wed Dec 05, 2007 12:57 pm

We own a bit. So little that Diehards will scream that it can't possibly help, "statistically". So much that Diehards will suggest it can hurt badly. Just enough to be interesting.

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Post by stratton » Wed Dec 05, 2007 1:03 pm

Tramper Al wrote:We own a bit. So little that Diehards will scream that it can't possibly help, "statistically". So much that Diehards will suggest it can hurt badly. Just enough to be interesting.
You had diehard like behavior and bought the least expensive one. :wink:

Paul

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Post by Tramper Al » Wed Dec 05, 2007 1:11 pm

stratton wrote:You had diehard like behavior and bought the least expensive one.
Hah, yes. Cheap if not clever.

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Post by grumel » Wed Dec 05, 2007 1:46 pm

isn't the whole point of this type of fund to deliver better-than-bond returns while having near-zero correlation to both bonds and stocks? If others could confirm that this is the objective of the fund, then maybe we can move the debate to whether or not the fund can achieve that objective.
Yes and that would be great. I just cant see any reason why this should work. Theres no logical difference between long / short and old fashioned active managment which doesnt work. Its even harder for the short part, since its more expensive.

But again, the very same effect could be achieved by an old fashioned active fund. Say this fund goes long at BMW and short at Mercedes, now if hes more often right then wrong, and even often enough to overcome the fees, the fund will create positive returns uncorelated to any asset class. Now an active fund will just buy BMW and not buy Mercedes. If hes more often right then wrong with his bets, he will outperform the the market, create some alpha uncorelated to the market, and this is much cheaper after fees due to no short selling costs and lower fees.

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Post by nisiprius » Wed Dec 05, 2007 2:33 pm

Tramper Al wrote:We own a bit. So little that Diehards will scream that it can't possibly help, "statistically". So much that Diehards will suggest it can hurt badly. Just enough to be interesting.
How about if I scream [cue echo effect]

Mark my words, it probably won't matter much!!!

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