My Favorite Alternative Funds

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DaufuskieNate
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Re: My Favorite Alternative Funds

Post by DaufuskieNate » Thu Oct 12, 2017 5:42 am

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. The portfolio would have a more than a 1.75% cost advantage per year coming out of the gate.

Packer
BRK has Selling, General and Administrative expenses of about $18 billion. That's 3.9% of their $460 billion market cap. It may only cost you a few basis points to hold BRK in your fund or account, but it certainly costs you more to have exposure to their reinsurance contracts. They have expenses too. I get it that you think holding insurance companies is better than owning a portfolio of reinsurance contracts, but the expense comparison you are trying to make is not apples to apples.

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packer16
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Re: My Favorite Alternative Funds

Post by packer16 » Thu Oct 12, 2017 7:06 am

You are correct, however for that $18 billion in expenses you get $18.2b in non-insurance after-tax income per year. So if those earnings earnings are capitalized at lets say 6.7% (15x P/E) you get $271.6 billion dollars. The additional value more than offsets the even small overhead Berkshire charges. In addition, the float generated by the re-insurance contract are generating more income than the contracts SRRIX holds.

It would be an interesting experiment to develop an insurance index of BKR, MKL & FFH & compare the results to SRRIX. Historically, this index has outperformed SRRIX significantly. I am not saying that re-insurance is not a good diversifying idea, it is. I just think folks need to look at alternative implementations, exp. if alternatives are cheaper, to get similar exposure.

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smackboy1
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Re: My Favorite Alternative Funds

Post by smackboy1 » Thu Oct 12, 2017 8:58 am

But isn't comparing SRRIX to the stock of reinsurance companies missing the point? An investment in SRRIX is exposure to returns and risks of only the profits and losses of the insurance underwriting. The quotas it holds are like profit/loss sharing contracts. Whereas investing in BRK or Munich Re or Lloyd's is exposure to returns and risks of the entire company which includes the profits and losses of the insurance underwriting, PLUS the rest of the company balance sheet. The companies invest their cash in the market, e.g. stocks and bonds or other businesses, which is not really want I want. I don't want correlation with the market. I want to own something that is correlated only with natural disaster losses. If I wanted market returns I would be better off buying it in the form of a broadly diversified passive index based fund rather than being forced to own whatever BRK owns.

Of course if I wanted to own BRK because I like Warren Buffet, that's a different kettle of fish. I bought BRK when it was down, along with every other stock, in 2008.

Owning SRRIX is like buying just the frosting without having to own the entire cupcake. Maybe I don't want cake because I already have enough of it elsewhere.
Disclaimer: nothing written here should be taken as legal advice, but I did stay at a Holiday Inn Express last night.

Random Walker
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Re: My Favorite Alternative Funds

Post by Random Walker » Thu Oct 12, 2017 11:19 am

I agree with smackboy1,
The point of SRRIX is to invest in reinsurance only, totally independent and uncorrelated with the stock market. The point is to diversify away from market beta. Once one invests in the stocks of insurance companies traded on the secondary market, he is completely exposing himself to more of the same market beta risk.

Dave

lack_ey
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Re: My Favorite Alternative Funds

Post by lack_ey » Thu Oct 12, 2017 11:33 am

What really counts is the performance ex-market. So if you subtract out the market beta of the stocks, what does that residual performance look like and what might it look like going forward? It could be a better deal in the end; I haven't looked in that carefully and I imagine it's difficult with the lack of performance history available for something like the Stone Ridge product.

Market correlation is fine as long as what you're getting on top of the market exposure is worthwhile going forward. Can a stock plausibly provide an excess return above market exposures on average under conditions under which the market return is low or negative? But there are also reasons to be skeptical of the stocks and the correlation is far from irrelevant. Also, if there exist stocks than that, that's effectively alpha over market beta, and that's therefore also a claim that there are stocks with negative alpha.

If you think about it, building a portfolio of relatively low-beta stocks with relatively low correlation to each other is similar to the goal of a minimum volatility-type fund. So there is some potential justification for some overweights relative to market cap.

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packer16
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Re: My Favorite Alternative Funds

Post by packer16 » Fri Oct 13, 2017 6:44 pm

I do not get the attraction of lower returning non-correlated assets. These assets smooth out returns but is there value in a smoothed but lower return. If you constrained by a constant withdraw rate this is the case. However, as an individual you do not have such a constraint as you can use a variable withdraw rate plan, buckets or vary expenses. This IMO is one of the pluses about Bogleheads (i.e. to develop strategies to deal with a non constant withdraw rate). If you can do this then you can invest primarily in the highest return assets & can less about the smoothness. There is a cost for smoothness so if you skip the cost you can have a bigger pot at the end.

The cost of a smooth re-insurance return stream is high versus a stream that includes other cash flows from other assets that create diversification internally. I am skeptical that the benefits expected will be realized as they assume correlations of the past will continue in the future & a portfolio of BRK, MRK & FFH will beat any re-insurance fund & if they beat them by sufficient margins then correlation has less utility than more return.

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Random Walker
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Re: My Favorite Alternative Funds

Post by Random Walker » Fri Oct 13, 2017 10:44 pm

Packer16 wrote
I do not get the attraction of lower returning non-correlated assets.
For me, I took from the Muni bond portion of my portfolio to create the SRRIX position. I expect Pre tax SRRIX returns to be equity like at perhaps 6%ish. I expect post tax returns to be substantially less, yet still more than what municipal bonds will make me. So compared to my portfolio without SRRIX, I expect the addition to improve expected return more than increase in risk, and expect higher Sharpe ratio.

Dave

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packer16
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Re: My Favorite Alternative Funds

Post by packer16 » Sat Oct 14, 2017 6:26 am

Dave,

Clearly you are taking in higher than bond like risk in your switch. I think if you are willing to take on more risk with a portion of your bond allocation (which I think makes great sense given interest rates today), you should also consider other alternative assets which can provide higher returns, like NNN real estate with an expected return in the low teens or buying a basket of re-insurance stocks. The cost of getting pure exposure is pretty high at 2% per year versus the lower cost alternatives of NNN real estate or re-insurance stocks.

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Valuethinker
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Re: My Favorite Alternative Funds

Post by Valuethinker » Sat Oct 14, 2017 8:33 am

smackboy1 wrote:
Thu Oct 12, 2017 8:58 am
But isn't comparing SRRIX to the stock of reinsurance companies missing the point? An investment in SRRIX is exposure to returns and risks of only the profits and losses of the insurance underwriting. The quotas it holds are like profit/loss sharing contracts. Whereas investing in BRK or Munich Re or Lloyd's is exposure to returns and risks of the entire company which includes the profits and losses of the insurance underwriting, PLUS the rest of the company balance sheet.
Just to clarify, Lloyd's Bank is not the insurance market, Lloyd's of London-- AFAIK there is no historical connection. Lloyd's of London was originally Edward Lloyd's coffee house, where backers of sailing ventures to the Indies met to insure their ships and cargo.

Lloyd's is a market, like the London Stock Exchange. It's not publicly listed (the LSE is now listed).

There are some listed Lloyd's brokers, although not as many as there used to be.
The companies invest their cash in the market, e.g. stocks and bonds or other businesses, which is not really want I want. I don't want correlation with the market. I want to own something that is correlated only with natural disaster losses. If I wanted market returns I would be better off buying it in the form of a broadly diversified passive index based fund rather than being forced to own whatever BRK owns.

Of course if I wanted to own BRK because I like Warren Buffet, that's a different kettle of fish. I bought BRK when it was down, along with every other stock, in 2008.

Owning SRRIX is like buying just the frosting without having to own the entire cupcake. Maybe I don't want cake because I already have enough of it elsewhere.
That is a fair characterization of the difference between investing in Lloyd's brokers, or insurers, or reinsurers vs. investing in reinsurance contracts themselves.

garlandwhizzer
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Re: My Favorite Alternative Funds

Post by garlandwhizzer » Sat Oct 14, 2017 5:34 pm

It's all a matter of personal taste, but alternate invests other than equity (US and INTL, cap weight and factor) in addition to high quality US high bonds are for me sufficient. I expect my portfolio value to go up and down in the short term but to go up reliably over the long term. I am comfortable with that. The main appeal of VRRIX as I understood it, was supposed to be "stock-like returns with bond-like risk." Backtesting up until Sept. 2017 supported that claim. However starting in Sept. 2017 we've had unusual damage from multiple major hurricanes, and now a major fires in California, all of which affect insurers and re-insurers bottom lines. The principal value of VRRIX has dropped more than 13% in less than 2 months. That is clearly not "bond-like risk." Quality bonds even in a bond bear market don't lose that much in several years. We don't know whether VRRIX's future returns are going to be stock-like or not. I suspect not as, to the surprise of many, the bull market keeps chugging on after 8 years. Up to now, the claim of "stock-like returns with bond-like risk" seems dubious.

The nice thing about having only equity and bonds is that one asset provides safety while the other provides increased long term returns. This allows each investor to rather simply titrate the relative weights of two assets exactly to his/her risk/return balance. Alternate investments for the sake of non-correlatioin to traditional assets seems to me, a guy who likes simplicity, a solution in search of a problem. For my purposes the numerous types of equity and the multiple classes of quality bonds are all I need.

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zaboomafoozarg
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Re: My Favorite Alternative Funds

Post by zaboomafoozarg » Sat Oct 14, 2017 7:46 pm

garlandwhizzer wrote:
Sat Oct 14, 2017 5:34 pm
The main appeal of VRRIX
Did you mean SRRIX, the Stone Ridge reinsurance fund?

Having worked in insurance and seeing the behavior of reinsurance, I wouldn't consider it bond-like. It was pretty consistently profitable but occasionally had a bad year that was more than the scale of loss you'd see from a government bond fund or even a total market bond fund.

I'd think about moving part of my stock allocation to a reinsurance fund if it didn't require an advisor to buy the fund.

Random Walker
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Re: My Favorite Alternative Funds

Post by Random Walker » Sat Oct 14, 2017 11:09 pm

GarlandWhizzer,
I’m a factor junkie, but I can’t really argue with anything you wrote. The single bet on market beta lacks diversification from factor point of view. I agree with you that the best diversifier is also the cheapest, high quality bonds. All the diversification beyond market beta and high quality bonds comes at increasing marginal cost and decreasing marginal benefit I believe. Everyone needs to make their own decision regarding increased cost for increased diversification. Costs are certain, the diversification benefits are only potential.

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DaufuskieNate
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Re: My Favorite Alternative Funds

Post by DaufuskieNate » Sun Oct 15, 2017 4:58 am

Garland,

Couple of thoughts. I do not view alternatives as bond-like risk. Volatility-wise, most of them are somewhat lower than stocks and somewhat higher than bonds. Some strategies also have tail risks that need to be understood.

Being risky investments, alternatives also benefit from diversification. I think it make sense to put together several alternatives funds in order to create a series of "bets" that are uncorrelated with stocks and bonds.

getco
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Re: My Favorite Alternative Funds

Post by getco » Sun Oct 15, 2017 7:56 am

Larry Swedroe had some thoughts on alt allocation in April, which I feel add to the discussion (He was/is 2:1 LENDX:SRRIX):
larryswedroe wrote:
Fri Apr 07, 2017 7:06 pm
Stone Ridge etc. say these are risky investments.
Well yes [SRRIX, LENDX] are risky investments, and that wording is what SEC requires of course. And certainly not SUBSTITUTE for CDs, but as alternatives (not sub) to CDs--in the case of LENDX, absolutely. Now you get much higher expected return, with much shorter duration and thus much less inflation risk, but trade off liquidity and some downside risk, but far from equity like risk, as greatest loss I would estimate to be under 10% which is small fraction of worst case for stocks. SRRIX should not be viewed as substitute for CDs, either.

With that said for those with high equity allocations I would recommend taking the allocation to these alternatives from the equity side as they should produce similar returns but greatly dampen portfolio volatility. So say 60% or higher. For those with very low equity allocations and the stomach to accept some more risk, but not equity like risk, then you can CONSIDER taking from bond side (as I did) as expected returns are much higher and it will increase portfolio vol by much less than expected returns as result of diversification benefits and far less than equity vol. So say that would hold for those with less than 40% equity. And if in between might take it pro rata.
-g

garlandwhizzer
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Re: My Favorite Alternative Funds

Post by garlandwhizzer » Sun Oct 15, 2017 12:53 pm

I wrote a post about VRRIX.
zaboomafoozarg wrote:
Did you mean SRRIX, the Stone Ridge reinsurance fund?
Yes, I did mean SRRIX. Thanks for the correction.

Garland Whizzer

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nedsaid
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Re: My Favorite Alternative Funds

Post by nedsaid » Sun Oct 15, 2017 1:58 pm

DaufuskieNate wrote:
Sun Oct 15, 2017 4:58 am
Garland,

Couple of thoughts. I do not view alternatives as bond-like risk. Volatility-wise, most of them are somewhat lower than stocks and somewhat higher than bonds. Some strategies also have tail risks that need to be understood.

Being risky investments, alternatives also benefit from diversification. I think it make sense to put together several alternatives funds in order to create a series of "bets" that are uncorrelated with stocks and bonds.
Boy, it sounds like High Yield Bonds would do a lot of the things we are expecting from Alternatives. These bonds are somewhere in between Stocks and Investment Grade Bonds.
A fool and his money are good for business.

DaufuskieNate
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Re: My Favorite Alternative Funds

Post by DaufuskieNate » Sun Oct 15, 2017 2:10 pm

nedsaid wrote:
Sun Oct 15, 2017 1:58 pm


Boy, it sounds like High Yield Bonds would do a lot of the things we are expecting from Alternatives. These bonds are somewhere in between Stocks and Investment Grade Bonds.
High Yield Bond funds load up pretty heavily on Beta, Term and Credit Risk. Same stuff you get in regular ole stock and bond portfolios. Not so diversifying.

rrppve
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Re: My Favorite Alternative Funds

Post by rrppve » Sun Oct 15, 2017 2:14 pm

High yield is correlated with equities, so it doesn't provide the same diversification benefit.
My favorite remains QSPIX with its zero beta exposure (equal long and short), positive factor exposure, multi-asset classes and daily liquidity.
The interval nature of LENDX and SRRIX along with difficulty in providing accurate daily pricing of their portfolio components makes me wary.

grok87
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Re: My Favorite Alternative Funds

Post by grok87 » Mon Oct 16, 2017 6:46 am

rrppve wrote:
Sun Oct 15, 2017 2:14 pm
High yield is correlated with equities, so it doesn't provide the same diversification benefit.
My favorite remains QSPIX with its zero beta exposure (equal long and short), positive factor exposure, multi-asset classes and daily liquidity.
The interval nature of LENDX and SRRIX along with difficulty in providing accurate daily pricing of their portfolio components makes me wary.
Watch out for the leverage in qspix.
All good fun until somebody loses an eye...
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packer16
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Re: My Favorite Alternative Funds

Post by packer16 » Mon Oct 16, 2017 7:27 am

Given the comment above on bonds being the best diversifier, I think some of the alternatives that are hybirds between bonds & an asset, like NNN real estate, ship & aircraft leasing, can provide significant diversification for reasonable costs of near 1% and high single digit to low double digit returns.

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garlandwhizzer
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Re: My Favorite Alternative Funds

Post by garlandwhizzer » Mon Oct 16, 2017 11:55 am

I think the use of alternate funds is a matter of personal taste. Lots of smart guys and adept investors use them. Lots of smart guys and adept investors don't use them. I'm with the latter group. Rational arguments can be made on both sides of this question.

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lack_ey
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Re: My Favorite Alternative Funds

Post by lack_ey » Mon Oct 16, 2017 12:40 pm

What you want from alternatives is at least bond-like returns with stock-like risk on the residual exposure you can't get from stocks and bonds, in a way that can plausibly work across different conditions. That is, the performance of the remainder once you subtract out the market beta and so on. Some funds have close to zero already. Others deliberately or accidentally keep some, and in that case you can't really give credit for excess returns over cash if this is from market exposures.

Equity risk is likely the best and most durable risk to take in the long term, but it can make sense to reduce reliance on the directional long-term bet on equities to produce returns, because it can go away for a long time and may not turn out to be as useful as we all think going forward. It's not just equity crash risk but the possibility of stocks doing nothing for 30 years (maybe under low enough growth, private equity beating public equity, public equity valuations being wrong especially near the top with the highest-market-cap stocks, etc.).

I would think about alternatives as falling into one (or more) of these three groups:
1. Not really much different or alternative — e.g. preferred stock, which don't look like much once equity and bond risks have been accounted for (likewise for a number of assets including junk bonds, though there's some evidence of junk bonds providing some limited excess return in exchange for unique risk, that's not explained by investment-grade bond or equity market risk)
2. Non-market related exposure to risk — e.g. direct real estate, timber, catastrophe bonds, peer-to-peer lending (though there may be some indirect relation to market and economic risks)
3. Trading strategy / differential return — relying on holding the right positions, changing these over time, e.g. market neutral-style funds like AQR Style Premia, or really the ex-market part of any active strategy

The first category is definitionally not that diversifying. We don't need a repackaging of existing risks.

The second category should be assets that have strong economic justification for providing return. Some might look at certain MLPs and other businesses, but to a large degree a number of these may be heavily explained by certain equity markets and risks that are obtainable elsewhere. You have to be careful about how much here is actually unique and if it can be expected to provide returns under different conditions. P2P lending definitely has credit risk, but it's not the same credit risk as from corporations, so the residual exposure may still be something unique and worthwhile.

The third category is potentially dangerous because you rely on a manager to pick the right trades over time that can generate a return. If you believe in factors, a factor-based approach might have a decent chance of success here in the long run. Otherwise, this is a bet on discretionary manager skill above costs.

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packer16
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Re: My Favorite Alternative Funds

Post by packer16 » Mon Oct 16, 2017 7:27 pm

Nice description. I would like to hear suggestions for low cost access to number 2 alternatives above.

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smackboy1
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Re: My Favorite Alternative Funds

Post by smackboy1 » Sun Oct 22, 2017 9:37 am

Something else to ponder is what is meant by "risk". What do you understand to be "bond-like risk" and what others are describing by the same term? I would guess that most people are only talking about standard deviation and correlation. So an investment with an SD of 10 would be said to have comparable risk to something else which also has an SD of 10. But what if one or neither investment is accurately modeled by a normal distribution (a.k.a. Gaussian curve)? What if there are massive outliers i.e. black swans? Comparing distributions of height of people is not the same as comparing net worth of people. I like the way Taleb thinks about risk and that's how I like to look at investment risk and expected return. When I look at investments like SRRIX or QSPIX I don't consider them as replacement for fixed income or equity, they are something else.
Disclaimer: nothing written here should be taken as legal advice, but I did stay at a Holiday Inn Express last night.

Random Walker
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Re: My Favorite Alternative Funds

Post by Random Walker » Sun Oct 22, 2017 10:08 am

Here are a few potential working definitions of risk:
Standard Deviation
Maximal drawdown in severe bear market
Not being able to maintain current lifestyle in retirement
Losing the ability to achieve needs (as opposed to wants)
Losing so much, one can’t stick to the plan any longer

I think it’s really useful to do mind experiments from each of these points of view when pondering one’s AA. Interested in other’s descriptions of Risk.

Dave

Random Walker
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Re: My Favorite Alternative Funds

Post by Random Walker » Sun Oct 22, 2017 10:15 am

Smackboy wrote
When I look at investments like SRRIX or QSPIX I don't consider them as replacement for fixed income or equity, they are something else.
They certainly are something else. But when one is considering creating a position in his portfolio for one of these alternatives, he needs to decide whether to take from stocks, bonds, or some of both. These alternatives will improve the efficiency of the portfolio either way. If one takes from the stock side, expected return stays about the same but volatility should decrease. If one takes from the bond side, expected return will increase and expected volatility will increase to a lesser extent. Of course portfolio costs increase too and on the taxable side this includes tax costs as well. There are tradeoffs between cost and portfolio efficiency.

Dave

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Re: My Favorite Alternative Funds

Post by Tanelorn » Tue Oct 31, 2017 8:31 pm

I didn't see as much discussion of Stone Ridge's Variance Risk Premium funds (which basically sell volatility via index put options), but the Emerging and International equity ones are shutting down:

https://www.sec.gov/Archives/edgar/data ... 34d497.htm

The US large and small cap equity VRP funds are still continuing for now. Here you can see some details on the various Stone Ridge funds and their holdings as of Apr'17:

http://archive.fast-edgar.com//20170710 ... EZZ22Z292/

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Robert T
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Re: My Favorite Alternative Funds

Post by Robert T » Sun Nov 12, 2017 4:02 pm

.
Some analysis on Alpha Architect Value Momentum Trend Index (tracked by relatively new VMOT ETF)
  • Factor loads [t-stats]: 1/1995-9/2017

    0.58 [22.3] = Mkt
    0.58 [11.4] = Size
    0.24 [.5.1] = Value
    0.24 [.7.5] = CS Momentum
    0.19 [11.8] = TS Momentum
    0.23 [.2.2] = Alpha

    All are statistically significant, R^2 = 0.8
  • 1995-2016: Annualized return (%) / 2008 return (%) / Sharpe ratio

    15.7 / -11.9 / 0.79 = Alpha Architect Value Momentum Trend Index*

    For context - here are some other comparisons

    10.8 / -41.6 / 0.54 = DFA Balanced Equity
    .9.1 / -18.7 / 0.73 = 58:42 DFA Balanced Equity:5-yr T-Notes**

    * Tracked by VMOT ETF
    ** 58% equity is used as the VMOT index factor load analysis above indicates that on average over this period VMOT index beta exposure was 58%
Obviously no guarantees

Robert
.

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Slick8503
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Re: My Favorite Alternative Funds

Post by Slick8503 » Mon Nov 13, 2017 9:07 am

Do you plan to use this fund in your portfoilio Robert T?

alphabeta01
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Re: My Favorite Alternative Funds

Post by alphabeta01 » Thu Nov 16, 2017 10:34 am

Robert T wrote:
Sun Nov 12, 2017 4:02 pm
.
Some analysis on Alpha Architect Value Momentum Trend Index (tracked by relatively new VMOT ETF)
  • Factor loads [t-stats]: 1/1995-9/2017

    0.58 [22.3] = Mkt
    0.58 [11.4] = Size
    0.24 [.5.1] = Value
    0.24 [.7.5] = CS Momentum
    0.19 [11.8] = TS Momentum
    0.23 [.2.2] = Alpha

    All are statistically significant, R^2 = 0.8
  • 1995-2016: Annualized return (%) / 2008 return (%) / Sharpe ratio

    15.7 / -11.9 / 0.79 = Alpha Architect Value Momentum Trend Index*

    For context - here are some other comparisons

    10.8 / -41.6 / 0.54 = DFA Balanced Equity
    .9.1 / -18.7 / 0.73 = 58:42 DFA Balanced Equity:5-yr T-Notes**

    * Tracked by VMOT ETF
    ** 58% equity is used as the VMOT index factor load analysis above indicates that on average over this period VMOT index beta exposure was 58%
Obviously no guarantees

Robert
.

How does this compare to AQR Long Short fund QLEIX? Are these two tracking mutually exclusive segments of Value/Momentum?

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Re: My Favorite Alternative Funds

Post by QuietProsperity » Thu Nov 16, 2017 11:50 am

alphabeta01 wrote:
Thu Nov 16, 2017 10:34 am
How does this compare to AQR Long Short fund QLEIX? Are these two tracking mutually exclusive segments of Value/Momentum?
The funds are somewhat similar but VMOT has a larger range of potential market (beta) exposures.

Even though VMOT does not explicity state that they use "Quality" in addition to Value and Momentum (QLEIX states it targets all three), if you read through VMOT's approach to gaining Value and Momentum exposure, there is clearly a nod to quality in both screens.

So from a Value/Momentum/Quality exposure stance, my guess is that they would be targeting similar factors.

The big difference is what each funds "beta" or market exposure could be at any given time.

QLEIX can (should) fluctuate between 0.3 and 0.7 beta. There long term goal is a beta of 0.5. They do not go net short (negative beta) or 100% long (~1.0 beta).

VMOT can be net short (negative beta), ~0.5 beta or 100% long (1.0 beta).

I have not dug into the QLEIX documents too much, but knowing AQR, my guess is that they incorporate time-series momentum (Trend-Following) into their models when it comes to deciding their "tactical beta exposure" (that 0.3 to 0.7 range).

I would also guess that AQR uses some semblance of a risk-parity approach (volatility) to set their factor exposures, much like VMOT does.

From my first impressions, I would venture to guess that over long periods of time, these funds would perform somewhat similarly. I would personally give the edge to VMOT for the following reasons:

1. Lower-Cost
2. More tax-efficient wraper (ETF v Mutual Fund)
3. Somewhat simpler in its construction. (Easier to understand)

I do not own either fund...so just my opinion.

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Re: My Favorite Alternative Funds

Post by alphabeta01 » Thu Nov 16, 2017 12:19 pm

QuietProsperity wrote:
Thu Nov 16, 2017 11:50 am
alphabeta01 wrote:
Thu Nov 16, 2017 10:34 am
How does this compare to AQR Long Short fund QLEIX? Are these two tracking mutually exclusive segments of Value/Momentum?
The funds are somewhat similar but VMOT has a larger range of potential market (beta) exposures.

Even though VMOT does not explicity state that they use "Quality" in addition to Value and Momentum (QLEIX states it targets all three), if you read through VMOT's approach to gaining Value and Momentum exposure, there is clearly a nod to quality in both screens.

So from a Value/Momentum/Quality exposure stance, my guess is that they would be targeting similar factors.

The big difference is what each funds "beta" or market exposure could be at any given time.

QLEIX can (should) fluctuate between 0.3 and 0.7 beta. There long term goal is a beta of 0.5. They do not go net short (negative beta) or 100% long (~1.0 beta).

VMOT can be net short (negative beta), ~0.5 beta or 100% long (1.0 beta).

I have not dug into the QLEIX documents too much, but knowing AQR, my guess is that they incorporate time-series momentum (Trend-Following) into their models when it comes to deciding their "tactical beta exposure" (that 0.3 to 0.7 range).

I would also guess that AQR uses some semblance of a risk-parity approach (volatility) to set their factor exposures, much like VMOT does.

From my first impressions, I would venture to guess that over long periods of time, these funds would perform somewhat similarly. I would personally give the edge to VMOT for the following reasons:

1. Lower-Cost
2. More tax-efficient wraper (ETF v Mutual Fund)
3. Somewhat simpler in its construction. (Easier to understand)

I do not own either fund...so just my opinion.
Thank you.

I also noticed that VMOT seems to be more concentrated with ~200(4x50) equal-weighted holdings vs 700 cap weighted holdings for QLEIX . VMOT prospectus mentions 'Conviction' :) VMOT Index is rebuilt annually vs QLEIX ( I am not sure).

I am invested QLEIX in a tax-deferred account. Not planning to change anytime soon. VMOT has fewer assets/trading volume. Definitely interested in hearing more views from the forum.

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Robert T
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Re: My Favorite Alternative Funds

Post by Robert T » Fri Nov 17, 2017 12:55 pm

.
For those interested.

Some aspects of QLEIX and VMOT are similar but there are also some major differences – the correlation between QLEIX since inception and the VMOT index has been 0.48 (where 1 is perfect correlation, and 0 is no correlation). One key difference is QLEIX takes long and short positions in gaining its value, momentum and quality tilts, and uses leverage. Current holdings – Long exposure = 143%; short exposure = 129% while VMOT takes only long positions to get tilt to value and momentum.

There is more transparency in what VMOT actually does together with simulated index returns from 1995 to give a clearer indication of factor exposure, likely tracking error etc., QLEIX is a bit of a black box and as a result more of a leap of faith for investors.

VMOT attempts to reduce extreme tail risk through use of ‘time series momentum’ – 12 month moving average and absolute momentum indicators to adjust its beta exposure. There was an earlier 24 page thread on this forum on 200 day moving averages (Dec 2008) – and after doing some analysis at that time I concluded that: “Backtest results are sensitive to asset class used, time period, duration of moving averages, buy and sell bands around the MA, and taxes (perhaps more).” I did not find much, if any, benefit of a moving average approaches vs. buy-and-hold.

Here’s another look.

Qudos to Wes Gray and team for making publicly available their backtested value and momentum indexes and the transparency of the VMOT approach. https://alphaarchitect.com/2017/06/06/t ... hilosophy/

Their data allows replication of a 12 month moving average and absolute momentum approach that can give investors a better idea of performance, tracking error etc. to make more informed decisions.

One concern I have with the VMOT backtest is that it is only to 1995, however their US value and momentum indexes allows testing back to 1975. Here are results of some of my analysis:
  • - a 50:50 combination of the Alpha Architect US Value and US Momentum indexes are used for the equity portion
    - 12 month MA: If current price minus the average of the past 12 month prices > 0 then 100% equity, if not then 100% T-bills. Checked at end of each month.
    - Absolute momentum: If total return over past 12 months minus t-bills > 0 then 100% equity, if not then 100% T-bills. Checked at end of each moth.
    - Combination of 12 month MA and Absolute momentum: If both 12 month MA and Absolute momentum indicate 100% equity then overall portfolio = 100% equity. If only one indicates 100% equity, the overall portfolio = 50% equity:50% t-bills. If neither indicate equities (i.e. are both in t-bills) then overall portfolio is 0% equity:100% t-bills.
As a baseline check:

1995-2016: Annualized return (%) / SD/ Sharpe / 2008 return
  • 15.7 / 18.4 / -11.9 = VMOT index
    14.8 / 18.1 / -7.9 = Simulated returns using above methodology
The key differences are VMOT is global with volatility weighting between value and momentum indexes, while the simulation above (to allow a longer test back to 1975) is US only and equal weighted between value and momentum. In addition, when VMOT moves to zero net beta exposure it will still retain a tilt to value and momentum (relative to broad US and Intl market indices).

1975-2016: Annualized return (%) / SD / Sharpe (from simulated series)
  • 16.0 / 21.2 / 0.62 = 12 month MA
    17.1 / 18.1 / 0.75 = Absolute momentum
    17.9 / 18.6 / 0.78 = Combination of 12 month MA/Absolute momentum
    18.1 / 17.1 / 0.86 = 80:20 equity:5-yr T-Notes
From the above analysis, the combination of 12 month MA / Absolute momentum performed better than each separately. However, as per my earlier analysis, an 80:20 equity:5 yr-T-notes portfolio annually rebalanced (buy-and-hold) is still tough to beat on a mean-variance basis.

What is not captured in the above analysis, is what VMOT is more explicitly trying to do – reduce extreme (downside) tail risk.

Does using 12 month MA/Absolute momentum reduce extreme tail risk? For extreme periods like 2008 it did. For example

2008 returns (%)
  • -13.8 = 12 month MA
    -5.6 = Absolute momentum
    -7.8 = Combination of 12 month MA/Absolute momentum
    -35.7 = 80:20 equity:5-yr T-Note split
With large differences in annual returns, tracking error was large: Over the full period the combination of 12 month MA/Absolute momentum lagged returns of the 80:20 equity:5yt T-note portfolio by more than 10% for 12% of the years, and by more than 5% for 26 percent of the years. In this respect there is a trade-off between reducing tracking error risk and ‘extreme’ downside risk.

A concern with these types of back-tests is that the methodology/combinations etc are likely selected based on what performed well in reducing extreme tail risks that showed up over the time period used for the back-test.

To test the robustness of the result, I extended the sample from 1927-1974 using Ken French data. To try to match the value, momentum (and net size) exposure of the Alpha Architect value and momentum indexes, I used 50:50 FF Small Value:FF large cap momentum as the equity portion. Over the 1975-2016 period the returns/SD were similar between the combination of 12 month MA / Absolute momentum and the 80:20 equity:5 yr T-notes although 2008 downside was lower for the former (+4%) than the latter (-25%). For the full 1927-2016 period shown below, there was more difference in returns.

1927-2016: Annualized return / SD / Sharpe ratio
  • 14.1 / 20.4 / 0.61 = Combination of 12 month MA/Absolute momentum
    12.9 / 20.9 / 0.55 = 80:20 equity:5-yr T-Notes
Two points worth noting (not shown above): (i) the combination of 12 month MA / Absolute momentum had higher returns and higher Sharpe than each individually – consistent with the shorter period findings, and (ii) combining value and momentum as the equity portion gave a higher Sharpe ratio than if using value alone.

How did the combination of 12 month MA/Absolute momentum series do in reducing extreme (downside) tail risk pre-1975.

Returns (%) of the series using a combination of 12 month MA/Absolute momentum vs. 80:20 equity:5-yr T-notes
  • 1929-32 = -32.4 vs. -60.9
    1937-41 = -36.3 vs. -28.8
    1973-74 = -1.0 vs. -27.7
To try to summarize some of the findings of the above analysis:
  • - The combination of 12 month MA / Absolute momentum portfolio (with a 50:50 value:momentum split for equity) provided similar (1975-2016) or somewhat better (1927-2016) returns that an 80:20 equity:5-yr T-notes portfolio. It provided more ‘extreme’ downside protection in most cases but not all (downside protection on average was better but not guaranteed in all cases e.g. it experienced more downside in 1937-41: -36.3% vs. -28.8%).
    - Tracking error was very large with the combination of 12 month MA / Absolute momentum lagging the 80:20 equity:5-yr T-notes portfolio by more than 10 percent for 12 percent of the time, and by more than 5 percent for 26 percent of the time.
    - Using a combination of 12 month MA / Absolute momentum performed better than each individually.
On a mean-variance basis there has not been a consistent benefit from using a 12 month MA /Absolute momentum vs. a ‘buy-and-hold’ (annually rebalanced) equity:fixed income portfolio, and higher returns could have be achieved by tilting equity more. However, on reducing ‘extreme’ tail risk there has been a benefit in most large market declines, but not all. Relative performance going forward will likely depend on whether we experience more market declines like 2008 or 1937-1941, if the latter then a fund like VMOT may not provide as much downside protection as a fixed equity:fixed income allocation, if there are more market declines like 2008 then it will likely provide more downside protection.

If you consider an all value portfolio (50:50 Alpha Architect US Value: Intl Value) with 25% 5-yr T-notes, then add a 10 percent allocation to VMOT with 5 percent taken from each of the equity and fixed income portions. The resulting equity allocation of 70% would be at the lower end of a 5/25 rebalancing band for the original 75% equity, ditto for 20% fixed income being at lower end of 5/25 rebalancing band. The 10% allocation to VMOT would vary the split (beta exposure) based on 12 month MA/Absolute return indicators. When VMOT = 100% equities, then total portfolio allocation to equities would be 80% - at the upper end of original 75% equity allocation 5/25 rebalancing band, and when VMOT = 0% then total portfolio allocation to equities = 70% which is the low end of the original 75% equity allocation 5/25 rebalancing band.

Backtest shows the following:

1995-2016: Annualized return / SD / Sharpe / 2008 return
  • 11.9 / 16.7 / 0.64 / -31.5 = 75:25 equity**:fixed income
    12.6 / 16.8 / 0.68 / -30.5 = 70:20:10 equity:fixed income:VMOT

    **Would note that the equity portion - 50:50 Alpha Architect US Value: Intl Value has a small cap and value load of about 0.3/0.4
No plans to add. Just/still doing some due diligence, and like the transparency of Alpha Architect that makes this easier to do.

Robert
.
Last edited by Robert T on Fri Nov 17, 2017 4:47 pm, edited 1 time in total.

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Slick8503
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Re: My Favorite Alternative Funds

Post by Slick8503 » Fri Nov 17, 2017 3:55 pm

Thanks so much for allowing us to benefit from your research Robert. I always learn from your postings.

Glad to see cheaper and more transparent options becoming available.

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Re: My Favorite Alternative Funds

Post by betablocker » Sat Nov 18, 2017 10:34 am

I'd recommend reading Wes Gray's DIY Financial Advisor book. He's also written books on quantitative momentum and value. They hue very close to the research and I think they are well worth a long look from factor investors. I have personally shifted a big chunk of my equity into VMOT and I'm using their recommendations to manage my bonds, commodities, and REITs with some modifications. Those are all in iShares, Vanguard, etcVMOT is concentrated at 200 stocks split roughly 50 each across dom/int value and dom/int momentum. The research shows that diversification benefits of adding additional positions beyond that level really tail off while the hit to returns is larger. They cite this research in DIY. VMOT also uses both types of trend following (50% each) to stay long on a positive trend and short a negative trend. They also publish the signals they use on their website if you want to manage your split between equities, bonds, and real assets as they do and as they describe in DIY.

These guys are the most open and transparent shop I've seen and everything is researched. This rules based, research based, transparent, and low cost model is the future in my opinion. They have a blog post or a book about almost every conceivable issue. They feel like the new AQR but I like that they have a comprehensive system rather than just one off products. What they lack is the track record having only had ETFs on the market for a few years but they have pedigree. Wes studied under Fama at Chicago and they are networked into the evidence based scene with Meb Faber, Ritholtz, Larry Swedroe, etc.

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Re: My Favorite Alternative Funds

Post by Theoretical » Thu Dec 07, 2017 8:37 am

https://am.jpmorgan.com/us/en/asset-man ... #Documents

http://www.etf.com/sections/daily-etf-w ... utures-etf

Here's a really interesting new ETF. It's a managed futures AND Carry ETF with a gross expense ratio of 1.02% and a net of .59%.

Managed futures/Time Series Momentum:
* Commodities
* Developed Market Currencies
* Developed Market Bonds
* Developed Market Equity Indices

Carry:
* Bonds
* Currencies
* Commodities

I'll be watching this one.

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Re: My Favorite Alternative Funds

Post by vesalius » Sat Dec 16, 2017 3:45 pm

I would be interested in peoples opinions, at least those not dead set against alt funds, on AQR's newer Alternative Risk Premia Fund (QRPIX) in comparison to older and now closed Style Premia Alternative Fund (QSPIX). I have a current position in QSPIX.

Alternative Risk Premia Fund (QRPIX) - Invest long and short across four different asset groups: Stocks & Industries, Equity Indices, Fixed Income and Currencies based on six investment styles: Value, Momentum, Carry, Defensive, Trend and Volatility.

Style Premia Alternative Fund (QSPIX) - Invest long and short across six different asset groups: Stocks of major developed markets, Country indices, Currencies, bond futures, interest rate futures, and Commodities based on four investment styles: Value, Momentum, Carry, and Defensive.

jalbert
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Re: My Favorite Alternative Funds

Post by jalbert » Sat Dec 16, 2017 4:09 pm

Random Walker wrote:
Thu Oct 12, 2017 11:19 am
I agree with smackboy1,
The point of SRRIX is to invest in reinsurance only, totally independent and uncorrelated with the stock market. The point is to diversify away from market beta. Once one invests in the stocks of insurance companies traded on the secondary market, he is completely exposing himself to more of the same market beta risk.

Dave
Catastrophe bonds got hammered in 2008/2009 due to liquidity problems caused by a sharp drop in demand while insurance companies were deleveraging. It is thus not correct to say that reinsurance is totally independent from and incorrelated with market beta.
Risk is not a guarantor of return.

Random Walker
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Re: My Favorite Alternative Funds

Post by Random Walker » Sat Dec 16, 2017 5:41 pm

Vesalius,
In general, I think it’s a very good idea to incorporate the factors you want in a single core or multi style fund. This way you avoid rebalancing costs and avoid one fund buying the same investment when the other one is selling. So I think it looks like a great idea to effectively add TS Momentum to the Style Premia Fund to make the new fund. I own QSPIX and QMHRX. Seems to me the new fund would replace both of those with a single fund.

Dave

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Re: My Favorite Alternative Funds

Post by Random Walker » Sat Dec 16, 2017 5:43 pm

Jalbert,
Isn’t corellated behavior in a single 1-2 year time frame a rather short time period to draw conclusions from?

Dave

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Re: My Favorite Alternative Funds

Post by Lieutenant.Columbo » Sat Dec 16, 2017 9:37 pm

vesalius wrote:
Sat Dec 16, 2017 3:45 pm
Alternative Risk Premia Fund (QRPIX) - Invest long and short across four different asset groups: Stocks & Industries, Equity Indices, Fixed Income and Currencies based on six investment styles: Value, Momentum, Carry, Defensive, Trend and Volatility.

Style Premia Alternative Fund (QSPIX) - Invest long and short across six different asset groups: Stocks of major developed markets, Country indices, Currencies, bond futures, interest rate futures, and Commodities based on four investment styles: Value, Momentum, Carry, and Defensive.
can anyone here explain why both funds wouldn't invest in the same asset groups?
maybe the newer fund isn't only an improvement in the number of targeted factors, but also a refinement in the selection of asset groups?
meaning, should QRPIX have been named QSPIX 2.0 instead? :wink:
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 jalbert » Sun Dec 17, 2017 2:39 pm

Random Walker wrote:
Sat Dec 16, 2017 5:43 pm
Jalbert,
Isn’t corellated behavior in a single 1-2 year time frame a rather short time period to draw conclusions from?

Dave
When an adverse event actually occurs, it becomes more than just a theoretical risk for the future— we now know it actually can happen. Before that, it was assumed that the price of cat bonds responded exclusively to risk and occurrence of catastrophic events.

Moreover, major equity market downturns are precisely when you most want the diversification benefit to hold up. So far, there has been precisely one bear market for equities since cat bonds became generally available, and the diversification failed.

Cat bonds may prove to be a useful diversification in future equity bear markets, and the fundamental drivers of their return suggest they will, but such a benefit is purely theoretical until we actually observe a major downturn where they hold up.
Risk is not a guarantor of return.

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Re: My Favorite Alternative Funds

Post by Random Walker » Sun Dec 17, 2017 3:59 pm

Also, the reinsurance funds are substantially more than just catastrophe bonds I believe. One can be diversified across all sorts of insurance risks.

Dave

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Re: My Favorite Alternative Funds

Post by Theoretical » Sun Dec 17, 2017 4:00 pm

Lieutenant.Columbo wrote:
Sat Dec 16, 2017 9:37 pm
vesalius wrote:
Sat Dec 16, 2017 3:45 pm
Alternative Risk Premia Fund (QRPIX) - Invest long and short across four different asset groups: Stocks & Industries, Equity Indices, Fixed Income and Currencies based on six investment styles: Value, Momentum, Carry, Defensive, Trend and Volatility.

Style Premia Alternative Fund (QSPIX) - Invest long and short across six different asset groups: Stocks of major developed markets, Country indices, Currencies, bond futures, interest rate futures, and Commodities based on four investment styles: Value, Momentum, Carry, and Defensive.
can anyone here explain why both funds wouldn't invest in the same asset groups?
maybe the newer fund isn't only an improvement in the number of targeted factors, but also a refinement in the selection of asset groups?
meaning, should QRPIX have been named QSPIX 2.0 instead? :wink:
It's caused by limited capacity in commodities, as there's literally only so much available to trade in certain commodities like cocoa beans.

jalbert
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Re: My Favorite Alternative Funds

Post by jalbert » Sun Dec 17, 2017 7:07 pm

Random Walker wrote:
Sun Dec 17, 2017 3:59 pm
Also, the reinsurance funds are substantially more than just catastrophe bonds I believe. One can be diversified across all sorts of insurance risks.

Dave
Per most recent (April 30, 2017) semi-annual or annual report on the Stoneridge website, SHRIX/SRRIX the Stoneridge Reinsuance fund held:

Event-linked bonds 80.5%
Reinsurance participation notes 4.3%
Reinsurance co. preferred shares 10.5%
Cash 1.3%
And the remaining 3.4% in various futures and currency hedges.

The fund is diversified globally across many reinsurance risk events. This diversification is important to reduce exposure to any one event. But I don’t think liquidity problems in 2008/2009 were specific to any particular reinsurance risk events.

I also doubt participation notes or preferred stock reduces the correlation with market beta— the insurance sector preferred stock likely would have fared even worse in 2008/2009.

As these are popular with institutional investors, it would be interesting to see what the due diligence evaluation of these funds looked like for some institutional-class investment group.

I guess as long as you include it as part of your equity allocation from a risk management perspective, it should be fine. I would be leery of depending on the diversification benefit to manage risk with a lower fixed income allocation.
Risk is not a guarantor of return.

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Re: My Favorite Alternative Funds

Post by Lieutenant.Columbo » Sun Dec 17, 2017 11:04 pm

Theoretical wrote:
Sun Dec 17, 2017 4:00 pm
Lieutenant.Columbo wrote:
Sat Dec 16, 2017 9:37 pm
vesalius wrote:
Sat Dec 16, 2017 3:45 pm
Alternative Risk Premia Fund (QRPIX) - Invest long and short across four different asset groups: Stocks & Industries, Equity Indices, Fixed Income and Currencies based on six investment styles: Value, Momentum, Carry, Defensive, Trend and Volatility.

Style Premia Alternative Fund (QSPIX) - Invest long and short across six different asset groups: Stocks of major developed markets, Country indices, Currencies, bond futures, interest rate futures, and Commodities based on four investment styles: Value, Momentum, Carry, and Defensive.
can anyone here explain why both funds wouldn't invest in the same asset groups?
maybe the newer fund isn't only an improvement in the number of targeted factors, but also a refinement in the selection of asset groups?
meaning, should QRPIX have been named QSPIX 2.0 instead? :wink:
It's caused by limited capacity in commodities, as there's literally only so much available to trade in certain commodities like cocoa beans.
thank you; I guess one day QSPIX itself might have to target other asset groups when it runs out of commodities to invest in...
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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