My Favorite Alternative Funds

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grok87
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Re: My Favorite Alternative Funds

Post by grok87 » Sat Jul 15, 2017 7:39 pm

Avo wrote:
grok87 wrote:2) Fama and French don't believe in the value premium any more either.
This is not at all what they say.

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

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

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

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

Maybe to move onto something actionable...

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

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

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

gtwhitegold
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Re: My Favorite Alternative Funds

Post by gtwhitegold » Sat Jul 15, 2017 10:49 pm

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

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Re: My Favorite Alternative Funds

Post by Avo » Sun Jul 16, 2017 12:40 am

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

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

Would be interested in what you and Robert think..
Robert T is far more of an expert than me.

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

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Re: My Favorite Alternative Funds

Post by lack_ey » Sun Jul 16, 2017 1:42 am

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

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

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Robert T
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Re: My Favorite Alternative Funds

Post by Robert T » Sun Jul 16, 2017 4:16 am

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

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

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

Would be interested in what you and Robert think..
Here are the returns from Ken French’s dataset:

1964-2016: Annualized Return / Standard Deviation / Sharpe Ratio / Max One Year Loss (2008)
  • 12.3 / 18.7 / 0.50 /-38.8 = FF Large Cap Low Investment/High Profit
    12.1 / 19.2 / 0.48 / -39.3 = FF Large Cap Value
    ..9.8 / 17.4 / 0.38 / -36.7 = FF Market
A 0.2% higher return and 0.5 lower standard deviation …

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

P1 = FF Large Cap Low Investment/High Profit
P2 = FF Large Cap Value
  • P1 / P2
    1.04 / 1.07 = Market
    -0.03 / 0.03 = Size
    0.37 / 0.05 = Profit
    0.55 / 0.65 = Investment
What impact would simply increasing exposure to high gross profit companies in a ‘value’ portfolio have on performance? This is what DFA did and the resulting effect in simulated historical performance was to increase annualized returns by 0.2 to 0.3% and to marginally lower the standard deviation (derived from the DFA Matrix books).
  • 1975-2012: Annualized return (%) / Standard Deviation

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

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

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

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

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

Robert
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Tramper Al
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Re: My Favorite Alternative Funds

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

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

1) Expenses. They matter in this universe too.

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

grok87
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Re: My Favorite Alternative Funds

Post by grok87 » Sun Jul 16, 2017 8:41 am

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

1) Expenses. They matter in this universe too.

2) VMNFX. I saw just a couple of mentions in passing, but Vanguard's own low cost retail hedge fund did not make the top 5 summary list? Yes, at one point I bought the indicated minimum direct from Vanguard and then scaled back to my AA target amount the very next day. But I have since found I can buy as little as $50 worth in a new or additional position, at WellsTrade. But I almost never see it discussed here in any serious way.
I own the fund VMNFX (vanguard market neutral) for 5-10% of my risk portfolio. Here are some of my thoughts:

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

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

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

grok87
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Re: My Favorite Alternative Funds

Post by grok87 » Sun Jul 16, 2017 8:44 am

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

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

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

Would be interested in what you and Robert think..
Here are the returns from Ken French’s dataset:

1964-2016: Annualized Return / Standard Deviation / Sharpe Ratio / Max One Year Loss (2008)
  • 12.3 / 18.7 / 0.50 /-38.8 = FF Large Cap Low Investment/High Profit
    12.1 / 19.2 / 0.48 / -39.3 = FF Large Cap Value
    ..9.8 / 17.4 / 0.38 / -36.7 = FF Market
A 0.2% higher return and 0.5 lower standard deviation …

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

P1 = FF Large Cap Low Investment/High Profit
P2 = FF Large Cap Value
  • P1 / P2
    1.04 / 1.07 = Market
    -0.03 / 0.03 = Size
    0.37 / 0.05 = Profit
    0.55 / 0.65 = Investment
What impact would simply increasing exposure to high gross profit companies in a ‘value’ portfolio have on performance? This is what DFA did and the resulting effect in simulated historical performance was to increase annualized returns by 0.2 to 0.3% and to marginally lower the standard deviation (derived from the DFA Matrix books).
  • 1975-2012: Annualized return (%) / Standard Deviation

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

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

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

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

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

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

grok87
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Re: My Favorite Alternative Funds

Post by grok87 » Sun Jul 16, 2017 8:44 am

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

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

Would be interested in what you and Robert think..
Robert T is far more of an expert than me.

I'm mostly all-in on the 3-fund protfolio these days, modulo some legacy holdings, and a modest stake in QSPNX that I bought in order to have access after the soft close, just in case I change my mind. I'm skeptical that the value premium will be accessible to retail investors at low enough cost going forward, and I'm especially skeptical of new-fangled factors, but who knows??
thanks Avo
"...people always live for ever when there is any annuity to be paid them"- Jane Austen

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Re: My Favorite Alternative Funds

Post by nedsaid » Sun Jul 16, 2017 4:50 pm

packer16 wrote: I really did believe that value had excess return but am now coming to the realization than Bogle is probably correct & the growth/value difference is largely cyclical and with increasing efficiency over time the excess return we have seen in the past is just the market becoming more efficient, therefore, waiting for a value premium to show up is based on hope more than anything else.
Packer
Packer, you have been a frequent contributor to "value" threads and a member of the Benjamin Graham school of bottoms up value investing. As I recall, you value businesses for a living. Seeing you throw in the towel really says something to me. Pretty much, when the last optimist finally gives up, a bull market is sure to follow. When the last advocate of value gives up, a rally of value stocks is on its way. It reminds me of the "Death of Equities" cover on BusinessWeek magazine.

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

Post by whodidntante » Sun Jul 16, 2017 5:03 pm

nedsaid wrote:
I keep saying that investors should be looking at plain old boring Large Cap Value.
Agreed. As far as I know, value isn't dead in the US market. Though it's certainly been on the wrong end of the bat lately.

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packer16
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Re: My Favorite Alternative Funds

Post by packer16 » Sun Jul 16, 2017 6:55 pm

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

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

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Re: My Favorite Alternative Funds

Post by HomerJ » Sun Jul 16, 2017 8:01 pm

grap0013 wrote:You're not gonna lose your shirt on this one IMO.
You going to cover my losses, if I do?

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Re: My Favorite Alternative Funds

Post by LadyGeek » Sun Jul 16, 2017 8:56 pm

New member WildCat48 has a question which I've moved into a new thread: [Need help to review alternative investment portfolio]
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Re: My Favorite Alternative Funds

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

grok87 wrote: To bring it back to the thread topic, are you aware of any alternative funds focused on long short "profitability/investment". I'm aware that some of the AQR alternatives may use these factors but they don't seem focused on them. They seem more focused on momentum and value.
cheers,
grok
No. But would just note that HML already includes some exposure to 'high profit' (RMW) and a lot of exposure to 'low investment' (CMA) as per the 0.23 and 1.04 loadings respectively in the earlier linked article. AQR also focuses on quality (profitability), not just momentum and value.
packer16 wrote:I currently have value (cumulative SCV vs. S&P 500) ahead of growth since 1996 (just before the tech rally) at cumulative 14%, this is yearly difference of .63% per year
If making the comparison with the S&P series.

January 1996 to June 2017 (21.5 yrs): Annualized returns
  • 8.6% = S&P 500
    10.9% = S&P SmallCap 600 Value
    2.3% = Difference in annualized returns
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grok87
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Re: My Favorite Alternative Funds

Post by grok87 » Sun Jul 16, 2017 10:13 pm

Robert T wrote:
grok87 wrote: To bring it back to the thread topic, are you aware of any alternative funds focused on long short "profitability/investment". I'm aware that some of the AQR alternatives may use these factors but they don't seem focused on them. They seem more focused on momentum and value.
cheers,
grok
No. But would just note that HML already includes some exposure to 'high profit' (RMW) and a lot of exposure to 'low investment' (CMA) as per the 0.23 and 1.04 loadings respectively in the earlier linked article. AQR also focuses on quality (profitability), not just momentum and value.
thanks
"...people always live for ever when there is any annuity to be paid them"- Jane Austen

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grap0013
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Re: My Favorite Alternative Funds

Post by grap0013 » Mon Jul 17, 2017 7:08 am

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

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

Image
That's an excellent point. It seems virtually every financial author has changed their recommendations at some point in their career. It can make one skeptical about the recommendations. Although finance is a very soft science I think this is analogous to medicine. Smart people change their mind when presented with new information as Larry says. I concur. Eg. MDs and other healthcare professionals that are practicing based on medical information in 1998 are not going to get the best outcomes and their patients will suffer for it. Same thing here. I believe in general there is always room for improvement. Bogle improved investing with the cap weighted index and it is erroneous in my opinion to assume we have reached the pinnacle of investment strategy knowledge. However, I do believe 99%+ of folks should probably just pick a target date fund.
There are no guarantees, only probabilities.

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Re: My Favorite Alternative Funds

Post by QuietProsperity » Mon Jul 17, 2017 2:00 pm

grap0013 wrote:It seems virtually every financial author has changed their recommendations at some point in their career.
This is everything and applies to us as investors too.

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

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Re: My Favorite Alternative Funds

Post by frisco » Fri Jul 21, 2017 1:47 am

packer16 wrote:Some IMO more understandable & less costly alternative funds include:

Broadstone Net Lease…
Ocean Yield ASA…
Brookfield Infrastructure Partners…
TPG Credit…

I like these vehicles because the cash flows that you receive are in essence bond-like payments with some modest appreciation in principal value over time. I also can understand the underwriting, assets and risks more than I can some of the other more "black box" alternatives that have performed well in simulations in the past. In many cases, these past simulated results have resulted in much different (in many cases lower) results when traded in the real world.

As Random Walker stated, I think these are nice FI substitutes for a portion of a FI allocation that is yielding next to nothing now & is not going to be needed for a few years.


Packer
packer16, thanks for sharing information about these funds.

I’m interested in your approach to investing, and I’d like to learn more:

1. How did you find these opportunities?
2. How did you vet them prior to investing?
3. How did you determine the amount to invest in each fund?

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packer16
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Re: My Favorite Alternative Funds

Post by packer16 » Fri Jul 21, 2017 10:56 pm

These were selected based upon exposure to fundamental sectors not represented in equity indicies (like shipping, infrastructure, alternative credit & net leased assets). Many of these have characteristics of bonds (fixed payments whose value is based upon the creditworthiness of leaser versus the value of the collateral). Another criteria has been good long-term underwriting of the risk involved. As to percentage invested, it depends upon how much risk you want to take. At the extreme you can hold 3 to 4 years of expenses in bonds and your remaining fixed asset allocation in these FI alternatives.

Packer
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WildCat48
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Re: My Favorite Alternative Funds

Post by WildCat48 » Fri Sep 08, 2017 11:28 am

It looks like SRRIX is sure taking a hit due to these Hurricanes....Not sure if I would want to be in this fund if I was a believer in climate change.

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grap0013
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Re: My Favorite Alternative Funds

Post by grap0013 » Fri Sep 08, 2017 12:58 pm

WildCat48 wrote:
Fri Sep 08, 2017 11:28 am
It looks like SRRIX is sure taking a hit due to these Hurricanes....Not sure if I would want to be in this fund if I was a believer in climate change.
All strategies have risks! It's still positive something like ~85% of months. Much better than equities ~60%. Plus the reinsurance industry would change their fees to remain profitable if there really was an increase in natural disasters. I have more conviction in this strategy after watching it and doing more homework on it. Recent events should not influence a well thought out plan.
There are no guarantees, only probabilities.

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Re: My Favorite Alternative Funds

Post by avalpert » Fri Sep 08, 2017 1:13 pm

grap0013 wrote:
Fri Sep 08, 2017 12:58 pm
WildCat48 wrote:
Fri Sep 08, 2017 11:28 am
It looks like SRRIX is sure taking a hit due to these Hurricanes....Not sure if I would want to be in this fund if I was a believer in climate change.
All strategies have risks! It's still positive something like ~85% of months. Much better than equities ~60%. Plus the reinsurance industry would change their fees to remain profitable if there really was an increase in natural disasters. I have more conviction in this strategy after watching it and doing more homework on it. Recent events should not influence a well thought out plan.
Who cares if it was positive for 51 out of the last 52 weeks when that one weeks wipes out all the gains and then some? That's what tail-risk looks like and this wasn't even that far out on the tail.

Recent events should influence a plan built around a security with little history when it's first test of even minor significance is a failure (assuming that is what drove the deep decline of course).

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matjen
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Re: My Favorite Alternative Funds

Post by matjen » Sat Sep 09, 2017 6:37 am

avalpert wrote:
Fri Sep 08, 2017 1:13 pm
Recent events sould influence a plan built around a security with little history when it's first test of even minor significance is a failure (assuming that is what drove the deep decline of course).
Minor significance? Massive hurricanes directly hitting Caribbean, Houston and Miami. Massive earthquake in Mexico. Huge fires out West? All at once!?! What do you want global thermonuclear war? In any case, the fund is operating as one would expect and as people like Larry Swedroe acknowledged. Of course there is tail risk. Stone Ridge marked it down in anticipation which seems like the mature thing to do. We will see what the true effect is on their investments. For those thinking about the fund this is probably great news since the next buy in is in October I believe (not that mother nature knows or cares about disaster frequency). Get your uncorrelated assets on the cheap! More here from Bloomberg.

https://www.bloomberg.com/news/articles ... rs-florida
The Stone Ridge fund gained 6.4 percent last year, 7.9 percent in 2015 and 11 percent in 2014, according to data compiled by Bloomberg. But this year, as Irma’s winds raise the specter of unprecedented damage, the fund has sunk 7.9 percent as of Thursday.

Mark Down

Stone Ridge Asset Management marked it down Tuesday based on models of possible losses from the hurricane, said Frani Feit, managing director of Tradition Capital Management, whose clients have invested in the fund for the past three years.
https://www.bloomberg.com/news/audio/20 ... utual-fund
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Re: My Favorite Alternative Funds

Post by avalpert » Sat Sep 09, 2017 8:29 am

matjen wrote:
Sat Sep 09, 2017 6:37 am
avalpert wrote:
Fri Sep 08, 2017 1:13 pm
Recent events sould influence a plan built around a security with little history when it's first test of even minor significance is a failure (assuming that is what drove the deep decline of course).
Minor significance? Massive hurricanes directly hitting Caribbean, Houston and Miami. Massive earthquake in Mexico. Huge fires out West?
Yes, minor significance as far as tails go - big hurricanes are not infrequent occurences, the earthquake was large but the damage from a reinsuers persepctive uninteresting and the fires out west aren't anything on the far end of the tail - and these are all geographically concentrated, weather events that this supposed diversified reinsurance portfolio isn't concentrated in.
All at once!?! What do you want global thermonuclear war?
That would be a good test, in fact even conventional war on the Korean Peninsula and across the Sea of Japan would be a good test - and let's not pretend that would be a black swan at this point.
In any case, the fund is operating as one would expect and as people like Larry Swedroe acknowledged.
No, I don't think it is.
Larry wrote:First I DO NOT advocate buying CAT bonds, with reason being that they are too concentrated in risks, heavy concentration in US hurricane risks. Rather own diversified portfolio with lots more types of risks and geographically diversified
Dropping 10% because of a hurricane does not sound like operating as a diversified fund without a heavy concentration on US hurricane risks.
Of course there is tail risk. Stone Ridge marked it down in anticipation which seems like the mature thing to do.
The mature thing to do is value it honestly and consistently - since I have no insight into their valuation methods I have no way of evaluating how they are doing on that front.
We will see what the true effect is on their investments. For those thinking about the fund this is probably great news since the next buy in is in October I believe (not that mother nature knows or cares about disaster frequency). Get your uncorrelated assets on the cheap! More here from Bloomberg.
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Re: My Favorite Alternative Funds

Post by crockpotinvesting » Sat Sep 09, 2017 8:38 am

Was that markdown a result of Harvey or the possible impact of Irma?

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matjen
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Re: My Favorite Alternative Funds

Post by matjen » Sat Sep 09, 2017 8:43 am

Avalpert, there is a difference between hurricane frequency and where they hit. We have had a long run of minor hurricane activity (see Roger Pielke's work). Now we have two massive ones make almost direct hits on major cities along with the other disasters mentioned. Fund gets marked down 10% or so which is what would be called a correction in equities. If It got marked down 45% (which could still happen of course) then I would agree with you.
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Re: My Favorite Alternative Funds

Post by matjen » Sat Sep 09, 2017 8:54 am

avalpert wrote:
Sat Sep 09, 2017 8:29 am

Yes, minor significance as far as tails go - big hurricanes are not infrequent occurences, the earthquake was large but the damage from a reinsuers persepctive uninteresting and the fires out west aren't anything on the far end of the tail - and these are all geographically concentrated, weather events that this supposed diversified reinsurance portfolio isn't concentrated in.
NOAA data clearly shows the U.S. has not been hit by a category 3 or stronger hurricane since 2005. Since 1970 only four category 4 or 5 US landfalls. Now combine that with two huge metropolitan areas getting almost direct hits from huge hurricanes and we get a 10+% markdown.

You know what happened more recently than 2005? The melting down of the entire global financial system. :shock:
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Re: My Favorite Alternative Funds

Post by Random Walker » Sat Sep 09, 2017 10:56 am

I have a 2% position in SRRIX. I too have been surprised at the ~10% drop, like 8% in a single day. I don't know what % of the fund is invested in types of insurance related to hurricane risk. I invested thinking that while each individual insurance has a big left tail risk, the diversification of risks overall would minimize the left tail of the fund. When these two huge hurricanes are put in historical context as above, sounds like the fund is behaving very reasonably. 10% doesn't sound huge at all.

Dave

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Lieutenant.Columbo
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Re: My Favorite Alternative Funds

Post by Lieutenant.Columbo » Sat Sep 09, 2017 11:54 am

Random Walker wrote:
Sat Sep 09, 2017 10:56 am
I have a 2% position in SRRIX. I too have been surprised at the ~10% drop, like 8% in a single day. I don't know what % of the fund is invested in types of insurance related to hurricane risk. I invested thinking that while each individual insurance has a big left tail risk, the diversification of risks overall would minimize the left tail of the fund. When these two huge hurricanes are put in historical context as above, sounds like the fund is behaving very reasonably. 10% doesn't sound huge at all.

Dave
isn't how much buyers are willing to pay or how little sellers are asking what drives the value of a fund down?
If so, did the value of SRRIX go down DURING or OUTSIDE its buy-in and sell time windows? :?
Lt. Columbo: Well, what do you know. Here I am talking with some of the smartest people in the world, and I didn't even notice!

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Re: My Favorite Alternative Funds

Post by Random Walker » Sat Sep 09, 2017 2:33 pm

LC,
You know I'm not an expert, but this is my best guess. The fund's shares are not traded on the secondary market. Being an interval fund, the shares are only offered and redeemed at a few specific times during the year. I believe the fund does have daily pricing though. The valuation I believe is performed by external auditors. So I believe no daily pricing determined by buyers and sellers.

Dave

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Re: My Favorite Alternative Funds

Post by midwayboomer » Sun Sep 10, 2017 5:56 pm

I am new to this forum (not to Vanguard) but these alternatives sound like what I have been
trying to avoid by using Vanguard. While we own approximately the same in a TD Ameritrade
account in both individual and mutual funds, both my wife's and my retirement (IRA and Roths)
are invested in Vanguard as well as standard investment account. These accounts contain about
12 different Vanguard funds and have been performing very well for the past 4 plus years in retirement.
The alternative funds discussed do not seem to add anything , perhaps from the discussion they add
management fees and investments costs above and beyond what Vanguard would charge.
I feel very comfortable with diversity and return that I am getting with Vanguard. Our TD Ameritrade
holds individual stocks and mutual funds and returns in excess of 3 % in dividends yearly. I have started
taking RMD's this year (my wife has about 7 years before she will need to take RMD) income from SS, TD Ameritrade
and RMD combined with some alternative income allows us to fully fund college education of 21 year old twins
and live comfortably in our long time home. I rode out both 2000-2001 and 2008-2009 downturns with portfolios
80% stocks 20% bonds. We keep 2 years of expenses in cash to protect against market downturns.
While I don't think I set it and forget it I see no point in over diversification and really no need for excessive fees.

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Re: My Favorite Alternative Funds

Post by avalpert » Sun Sep 10, 2017 8:56 pm

matjen wrote:
Sat Sep 09, 2017 8:54 am
avalpert wrote:
Sat Sep 09, 2017 8:29 am

Yes, minor significance as far as tails go - big hurricanes are not infrequent occurences, the earthquake was large but the damage from a reinsuers persepctive uninteresting and the fires out west aren't anything on the far end of the tail - and these are all geographically concentrated, weather events that this supposed diversified reinsurance portfolio isn't concentrated in.
NOAA data clearly shows the U.S. has not been hit by a category 3 or stronger hurricane since 2005. Since 1970 only four category 4 or 5 US landfalls. Now combine that with two huge metropolitan areas getting almost direct hits from huge hurricanes and we get a 10+% markdown.

You know what happened more recently than 2005? The melting down of the entire global financial system. :shock:
Sandy in 2012 was about $30 billion in insurance losses, Ike in 2008 was ~$20 billion - looking at the category hurricanes isn't really meaningful measure here. When Larry said they modeled 2005 would have been down 15% that was taking into account Katrina, Wilma, Rita, the tsunami, probably residual claims from Charley, the London bombings... If a single event here dropped it 10%, does 15% sound like a realistic assessment for that year?

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Re: My Favorite Alternative Funds

Post by stlutz » Sun Sep 10, 2017 10:17 pm

Sandy in 2012 was about $30 billion in insurance losses, Ike in 2008 was ~$20 billion - looking at the category hurricanes isn't really meaningful measure here. When Larry said they modeled 2005 would have been down 15% that was taking into account Katrina, Wilma, Rita, the tsunami, probably residual claims from Charley, the London bombings... If a single event here dropped it 10%, does 15% sound like a realistic assessment for that year?
In fairness, Stone Ridge marked it down based on both hurricanes, not just one (they have to use fair value pricing). However, it has dropped just shy of 14% over the past couple of weeks. That will of course adjust up or down as more is known about the actual claims from Irma.

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Re: My Favorite Alternative Funds

Post by GreatOdinsRaven » Sun Sep 10, 2017 10:52 pm

avalpert wrote:
Sat Sep 09, 2017 8:29 am
In any case, the fund is operating as one would expect and as people like Larry Swedroe acknowledged.
No, I don't think it is.
Larry wrote:First I DO NOT advocate buying CAT bonds, with reason being that they are too concentrated in risks, heavy concentration in US hurricane risks. Rather own diversified portfolio with lots more types of risks and geographically diversified
Dropping 10% because of a hurricane does not sound like operating as a diversified fund without a heavy concentration on US hurricane risks.
Recent communication from Stoneridge regarding Harvey and Irma states that the SRRIX fund is not a diversified fund. Their communication states:

"The Funds are classified as non-diversified under the 1940 Act. Accordingly, the Funds may invest a greater portion of their assets in the securities of a single issuer than if they were “diversified” funds. To the extent that the Funds invest a higher percentage of their assets in the securities of a single issuer, the Funds are subject to a higher degree of risk associated with and developments affecting that issuer than a fund that invests more widely."

But I am also hearing from people not affiliated with Stoneridge that the fund does indeed have globally diversified exposure to the insurance market regardless of the language of Stoneridge's statement, but that the big drivers of that marketplace are FL hurricane risk, CA earthquake risk and Japanese typhoon risk.

Will be interesting to see how things shake out with SRRIX.
"The greatest enemies of the equity investor are expenses and emotions." -John C. Bogle, Little Book of Common Sense Investing. | | "Winter is coming." Lord Eddard Stark.

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Re: My Favorite Alternative Funds

Post by matjen » Mon Sep 11, 2017 5:57 am

stlutz wrote:
Sun Sep 10, 2017 10:17 pm
Sandy in 2012 was about $30 billion in insurance losses, Ike in 2008 was ~$20 billion - looking at the category hurricanes isn't really meaningful measure here. When Larry said they modeled 2005 would have been down 15% that was taking into account Katrina, Wilma, Rita, the tsunami, probably residual claims from Charley, the London bombings... If a single event here dropped it 10%, does 15% sound like a realistic assessment for that year?
In fairness, Stone Ridge marked it down based on both hurricanes, not just one (they have to use fair value pricing). However, it has dropped just shy of 14% over the past couple of weeks. That will of course adjust up or down as more is known about the actual claims from Irma.
Exactly. There have been two and they have been large and they have been in population centers. That is why I bring up the Category levels. The WSJ has an article on how reinsurers (and Cat Bonds) have a much larger role in these events than in the past. Why someone would expect SRRIX to not go down 10% or whatever (meaning a decent correction) is what fascinates me. This is exactly what causes it to go down. It would be like expecting the S&P500 not to go down during an equity bear market.

Bloomberg this morning listed damages on Irma alone to be downgraded to 49 billion from as high as 100 billion. (Not sure what insurance losses will be but Harvey was in excess of 10 billion estimated).
After making landfall in the Florida Keys yesterday morning as a Category 4 storm, Hurricane Irma weakened as it traveled through the state’s west coast, with the latest reports downgrading it to a Category 1 storm with top winds of 85 miles per hour. Estimates for the total damage have dropped to $49 billion from as high as $200 billion.
Reinsurers Will Largely Be Writing the Checks to Pay for Irma Damage
Reinsurers play an especially large role in Florida because smaller insurance carriers are required to buy ample reinsurance
https://www.wsj.com/articles/reinsurers ... 1505072525
Andrew, Katrina and other severe hurricanes from 1992 through 2005 devastated the state’s insurance marketplace. Most brand-name national home insurers sharply reduced their presence. Picking up the slack today is a state-run “insurer of last resort,” Citizens Property Insurance Corp., and some 50 small to midsize home insurers. Those carriers all are required to buy ample amounts of reinsurance to help ensure they have money for their policyholders, because they don’t have the fat capital cushions of the national carriers. These reinsurance firms are specialty insurers that take on the risk of some of the policies sold by primary insurers. They send insurers money to help pay claims once claims reach contractual, designated levels.
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Re: My Favorite Alternative Funds

Post by grap0013 » Mon Sep 11, 2017 7:03 am

midwayboomer wrote:
Sun Sep 10, 2017 5:56 pm
Our TD Ameritrade holds individual stocks and mutual funds and returns in excess of 3 % in dividends yearly.
Individual stocks are waaaaayyyy more risky than anything listed in this thread. Not even close. You are entitled to your opinion of course.
There are no guarantees, only probabilities.

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Re: My Favorite Alternative Funds

Post by avalpert » Mon Sep 11, 2017 7:15 am

matjen wrote:
Mon Sep 11, 2017 5:57 am
Why someone would expect SRRIX to not go down 10% or whatever (meaning a decent correction) is what fascinates me. This is exactly what causes it to go down.
Because Larry told me the worst historical annual loss in their modeling of this fund was only 15% and even these two together don't make it like 2005 for the reinsurance industry. He also told me it's risks aren't as concentrated in US Hurricane exposure, so I wouldn't expect the worst historical loss to be driven solely by US hurricane losses either. That is why - now personally, while I haven't put a number on it because I don't have any access to their backwards constructed holdings used to make meaningful estimates, I'm not surprised and would expect hits of this magnitude to be more regular occurences - but if I was investing in this because I expected equity-like performance with bond-like risks in the holy grail of diversification, I would be revisiting my assumptions.

As for hurricane categories - measure of wind strength are poor proxies for insurance costs. Katrina was a 3, Sandy was a 1, Lili was a 4 - which were more damaging? Harvey's major damage had little to do with it being a Category 4 and almost everything to do with it hovering the way it did and the amount of rain it dropped as a result. Looking at the historical landfalls of 'major hurricanes' is a poor way to look at insurance risk exposure - and to me, framing it that way reflect the lack of understanding in how to model the risks of this type of security by those who aren't actuaries in businesses covering those risks and should call into question taking on funds like this for retail investors (and retail advisors who are no more able to evaluate the risks associated with it than their investors).

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matjen
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Re: My Favorite Alternative Funds

Post by matjen » Mon Sep 11, 2017 7:29 am

Fair point...if we were looking at 30% losses which we aren't (as of now). You also seem to be forgetting that these tore through the Caribbean as well. Along with the other disasters going on which certainly add on a bit. The damage amount is greatly determined by where they land it seems to me. All I am saying is these were/are big ones and they hit major areas so a drop in SRRIX of this nature should be expected. I think you are too early to crow about it not performing as expected/sold.

http://nypost.com/2017/09/07/irmas-path ... ibbean/#15

I'm not an investor in it but if one expects 5% to 8% returns with the occasional 10-20% drop and little/no correlation to equities/bonds it seems like a reasonable expectation. I believe equity corrections of 10% or more happen every year or two on average by comparison.
A man is rich in proportion to the number of things he can afford to let alone.

getco
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Re: My Favorite Alternative Funds

Post by getco » Mon Sep 11, 2017 10:02 pm

Bogleheads,

Here is an excerpt from Stone Ridge's Annual Report (Oct 31, 2016) (emphasis theirs):
http://stoneridgefunds.com/documents/In ... Report.pdf (Page 5)
HEALTH WARNING: WHAT WE DO IS VERY RISKY

2016 was far from a smooth ride and, given the diversity of our risk exposures, no year ever will be. Our
reinsurance portfolios took many hits in 2016, including the Fort McMurray wildfires, Hurricane Matthew,
and a magnitude 7.8 earthquake in New Zealand. Our Variance Risk Premium (VRP) franchise suffered
from three material volatility spikes due to the worst first six calendar weeks for US equity markets in
history, Brexit, and the US election. Yet across all products, Stone Ridge delivered ten positive months
and $643 million of trading profits in 2016.

Since inception, 44 of our 47 months have been profitable. That’s absolutely unsustainable. Our
performance since inception materially understates the true risk of our strategies.
In particular,
historical volatility is an often misleading and always incomplete measure of risk for any strategy, but
especially for those involving insurance-related investments. Do not get lulled into a false sense of
security when looking at the consistency of our past results. In future years, there will be tragic
earthquakes and hurricanes. There will be market crashes and credit crises. Our risk management goal is
to have a very bad quarter or year, not a bad decade.
SRRIX NAV was volatile in the days surrounding 2016 Hurricane Matthew making US Landfall, dropping ~5% before rebounding near its pre-hurricane value. I'd guess this is to be expected when marking illiquid derivatives to market in the middle of a triggering event.

This is, of course, the largest such markdown in the fund's short history, ~14% at its low, though currently ~9% off its pre-hurricane NAV. Will be interesting to see how it behaves going forward.

Cheers,
-g

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Re: My Favorite Alternative Funds

Post by james22 » Tue Sep 12, 2017 3:50 am

How attractive would you find VASFX if made available, grap?

Sure would like to think they'll offer it as they do VMNFX soon.
This whole episode is likely to end so badly that future children will learn about it in school and shake their heads in wonder at the rank stupidity of it all... Hussman

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matjen
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Re: My Favorite Alternative Funds

Post by matjen » Tue Sep 12, 2017 5:26 pm

matjen wrote:
Mon Sep 11, 2017 7:29 am
I think you are too early to crow about it not performing as expected/sold.
And just like that SRRIX is up 5.5%...
Hurricane Irma made landfall in the Florida Keys early Sunday, then moved up the state’s west coast. Even at the upper end of Monday’s projections of roughly $40 billion of damage, the storm is well below the $130 billion mark that put cat-bond investors on edge last week as Irma barreled across the Caribbean and seemed destined to strike Miami.
https://www.wsj.com/articles/catastroph ... 1505165379
A man is rich in proportion to the number of things he can afford to let alone.

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Re: My Favorite Alternative Funds

Post by garlandwhizzer » Tue Sep 12, 2017 6:18 pm

HEALTH WARNING: WHAT WE DO IS VERY RISKY

2016 was far from a smooth ride and, given the diversity of our risk exposures, no year ever will be. Our
reinsurance portfolios took many hits in 2016, including the Fort McMurray wildfires, Hurricane Matthew,
and a magnitude 7.8 earthquake in New Zealand. Our Variance Risk Premium (VRP) franchise suffered
from three material volatility spikes due to the worst first six calendar weeks for US equity markets in
history, Brexit, and the US election. Yet across all products, Stone Ridge delivered ten positive months
and $643 million of trading profits in 2016.

Since inception, 44 of our 47 months have been profitable. That’s absolutely unsustainable. Our
performance since inception materially understates the true risk of our strategies. In particular,
historical volatility is an often misleading and always incomplete measure of risk for any strategy, but
especially for those involving insurance-related investments. Do not get lulled into a false sense of
security when looking at the consistency of our past results. In future years, there will be tragic
earthquakes and hurricanes. There will be market crashes and credit crises. Our risk management goal is
to have a very bad quarter or year, not a bad decade.
I am very impressed that Stone Ridge put this in their 2016 annual report. Seems like an honest assessment rather than a sales pitch. It suggests that, while their wide diversification reduces risk, it is still riskier than backtesting suggests. Good timing, telling shareholders in 2016 that the high Sharpe ratios may not be hold up over time, likely the case in 2017.

Garland Whizzer

Random Walker
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Re: My Favorite Alternative Funds

Post by Random Walker » Tue Sep 12, 2017 8:07 pm

I agree with garlandwhizzer. I think that statement from Stone Ridge semi annual report was very straightforward, honest, humble, and correct. Garland comments on the Sharpe ratios of the individual strategies. Mostly from reading Larry's most recent book, I've gained some appreciation for Sharpe ratios of individual assets in isolation. But I'd like to point out that what really counts is what the addition of an asset does to the Sharpe ratio of the portfolio as a whole. That's the real potential benefit of these alternatives.

Dave

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Re: My Favorite Alternative Funds

Post by getco » Wed Oct 11, 2017 9:01 am

Bogleheads,

Here is an interesting article from Artemis (risk securities blog) re: Stone Ridge and it's SRRIX Reinsurance products:

http://www.artemis.bm/blog/2017/10/02/s ... nd-assets/

The article is written under a pretty boring pretense (fund inflows), but there is an interesting excerpt (emphasis mine):
It’s expected that Stone Ridge will take a significant hit to its interval fund in particular, given the broad exposure to property catastrophe reinsurance and retrocession structures. The quota shares and sidecars are likely to face some level of losses in many cases and even the fund exposure via Aeolus will be exposed to recent events as well.

Additionally, Stone Ridge holds the Manatee 2016-1 catastrophe bond which is expected to be a total loss due to hurricane Irma, the FONDEN IBRD Class A notes that are expected to be a total loss due to the Mexico earthquake, as well as many of the catastrophe bonds deemed most exposed to recent events (the Galileo’s, Galilei’s, Citrus’, Blue Halo’s and Kilimanjaro’s).

Given Stone Ridge’s ILS strategy has grown so fast it now has one of the broadest portfolios of catastrophe risk, almost an index of the market, meaning it will pay significant claims following recent catastrophic events.
If they can push costs down a bit, the ability to hold an all-world catastrophe index at a reasonable cost (let's don't quibble over reasonable) seems very interesting.

-g

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Re: My Favorite Alternative Funds

Post by packer16 » Wed Oct 11, 2017 6:53 pm

The costs are the big issue here. You pay 2% for something you can get from some of the best insurance risk managers in the world for a few basis points. These managers are well known & have long track records. They include Warren Buffet & Ajit Jain at Berkshire, the Markel brothers at Markel and Prem Watsa at Fairfax. The idea that folks are worried about correlation between other assets in their portfolio & these insurance company is way overblow IMO. Given the volatility of SRRIX, I am assuming you would not use it as a bond equivalent & your investment horizon would be greater than 5 years. If that is the case, then you can be pretty much guaranteed that over a 5 year period an equally weighted portfolio of Berkshire, Markel & Fairfax would our perform SRRIX. The portfolio would have a more than a 1.75% cost advantage per year coming out of the gate.

Packer
Buy cheap and something good might happen

lack_ey
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Re: My Favorite Alternative Funds

Post by lack_ey » Wed Oct 11, 2017 7:12 pm

packer16 wrote:
Wed Oct 11, 2017 6:53 pm
The costs are the big issue here. You pay 2% for something you can get from some of the best insurance risk managers in the world for a few basis points. These managers are well known & have long track records. They include Warren Buffet & Ajit Jain at Berkshire, the Markel brothers at Markel and Prem Watsa at Fairfax. The idea that folks are worried about correlation between other assets in their portfolio & these insurance company is way overblow IMO. Given the volatility of SRRIX, I am assuming you would not use it as a bond equivalent & your investment horizon would be greater than 5 years. If that is the case, then you can be pretty much guaranteed that over a 5 year period an equally weighted portfolio of Berkshire, Markel & Fairfax would our perform SRRIX. The portfolio would have a more than a 1.75% cost advantage per year coming out of the gate.

Packer
Sure, but a stock like that has its own issues even besides trading with the market and having significant correlation there, having underlying operational costs of running the actual companies sapping returns there too, and being priced at a multiple of expected future profits. In theory—though the empirical evidence would be shakier—you would see that companies run by better managers would trade at higher multiples, which would equalize and remove the forward return advantage.

This is like the difference between the TIAA real estate account and then two or three hand-picked REITs that had good past performance (whatever that says about forward returns). Well, except the costs here are even higher.

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packer16
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Re: My Favorite Alternative Funds

Post by packer16 » Wed Oct 11, 2017 7:29 pm

The bigger issue I see is there are some portions of the re-insurance market you do not want to be exposed to at any time & other times you want to load up. The real masters (Buffett, Markel & Watsa) know when and how to be in these markets. The average underwriters do not make money so I do not see the appeal of getting average underwriting returns and paying over 2% to do so with guys who are not the best players at the table & may be the patsies when playing against Buffet, Markel & Watsa. You get low correlation but there alot of asset that you get low correlation but the returns are so bad that it does not make sense to invest in them like gold for example.

I think the point about equity correlation is a red herring as most of the insurance portfolios are invested in bonds. Also, if you time horizon is 5 years or more for this type of an investment the tradeoff of more return for short-term volatility may be worth it.

I think if you look at the overhead or expense ratios of each of these insurance companies the would be in the basis point range. I think your analogy makes sense if the REITs you invest in are more diversified and have a lower expense ratio than TIAA CREF, maybe a fund like Broadstone Net Lease.

Packer
Buy cheap and something good might happen

lack_ey
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Re: My Favorite Alternative Funds

Post by lack_ey » Wed Oct 11, 2017 8:09 pm

The returns are stocklike because they're traded as stocks, and people buy and sell with other stocks, and it can move as investor expectations for what valuations and multiples should look like change.

Image
http://quotes.morningstar.com/chart/fun ... A%5B%5D%7D

I wouldn't want to (and don't) pay Stone Ridge fees either, but I'm less convinced you can really pick which stocks to use that effectively, and that there's as much benefit going that route.

I'm not inherently opposed to overweighting sectors, though. Just usually skeptical.

Random Walker
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Re: My Favorite Alternative Funds

Post by Random Walker » Wed Oct 11, 2017 8:31 pm

Packer16,
I have SSRIX. I certainly wouldn’t call it a bond equivalent, but I did take from the bond side of the portfolio to create the position. My rationale was greater expected after tax returns than Muni bonds, SD about half that of equities, lack of correlation to both stocks and bonds. Overall I expect it to increase portfolio expected return, increase portfolio volatility to a lesser extent, increase portfolio Sharpe ratio.

Dave

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