Cliff Asness: Liquid Alt Ragnarok?

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Elysium
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Re: Cliff Asness: Liquid Alt Ragnarok?

Post by Elysium » Wed Sep 12, 2018 2:22 pm

larryswedroe wrote:
Wed Sep 12, 2018 12:20 pm
Obviously they are not the same situation between lending crisis and the models employed vs. the models employed by AQR. However, the point remains all models have some basic assumptions they take into consideration. What you are suggesting is that AQR is different, and theirs is based on sound theory. I am skeptical until proven wrong with evidence of long enough performance history under different market scenarios. It's just a large leap of faith to say, here trust us, we got this right and all the others are wrong.
Yes that is true. But there is absolutely rigorous research and logic and evidence and plenty of data to support their strategies. It's all well documented and even presented in my book Your Complete Guide to Factor Based Investing, where each factor is tested for persistence, pervasiveness, robustness, implementability and intuitiveness. In every case. Now if you are not aware of all the evidence that's one thing. You can also disagree with the conclusions. That's fine too. But saying AQR are snake oil salesmen is an attack without justification and IMO if going to do so one should at least have courage to put their name behind it, not hide anonymously.
One more time for the record, I never called anyone snake oil salemen, since you quoted my text in response just making sure the reccord is correct. I have not made any attacks on anyone on this forum, ever. Disagreeing with ideas, or calling out inconsistencies in statements made over the years should not be considered as an attack. Consistency of statements do matter, for instance, I'll bring up two major topics of disagreements between advisors over here and on the old forum.

1. Troutner vs. Swedroe on REITs - on this issue Troutner argued REITs are unnecessary addition to a portfolio and taking away space from investing in Small Value otherwise. That there is no evidence of REITs providing additional incentives to a portffolio of small value stocks. Swedroe's position: REIT are a unique asset and there is plenty of academic evidence in favor of including them. Lately, you had changed your mind. Does that mean, all those arguments with Troutner should have been avoided and he was right after all.

2. Ferri vs Swedroe on CCFs - on this Ferri argued CCFs provide no value to a portfolio, since they do not provide gorwth or dividents, and added costs bring down any advantage, as well as they are not intended for investment portfolios held by individuals Swedroe's position: CCFs are a unique asset that adds benefits to a portffolio when used properly by taking away from equities, and also going long on term risk. Here too, the position has changed over the years. Does that mean all those debates could have been avoided and Ferri was right all along.

Again, not an attack, just presenting the internal inconsistency on these topics, and I have a hard time acccepting the latest case for liquid alts for these reasons.

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Re: Cliff Asness: Liquid Alt Ragnarok?

Post by larryswedroe » Wed Sep 12, 2018 2:57 pm

Elysium
Sorry if I misinterpreted your view but I got that view since you quoted this Elysium » Sun Sep 09, 2018 8:13 pm

AlphaLess wrote: ↑Sun Sep 09, 2018 5:38 pm
I don't trust Cliff Asness. Another snake oil salesman.

So I should have stated AlphaLess is the one with the problem. Again, my apology if I got that wrong.

As to your two points, I would still say Troutner was wrong about not including REITS. We want them in a portfolio but just no need to treat them as a separate asset class as their returns are well explained by other factors. And REITS not that tax inefficient since no migration of stocks across asset classes. So if going to own a broadly diversified portfolio own REITS within that portfolio (which is cheaper way to do so and avoids rebalancing) and if tilting should include REITS in the tilted portfolio. That would be my preference. Just don't treat as alternative/unique asset class.

Second, on the CCF, nothing changed about my view of CCF as diversifier of risks, it all had to do with valuations (contango) and the assumption that over time it would average zero, which was about historical average, the financialization may have changed that, or other issues such as supply might have changed that, and so we got in era of persistent contango and so that was a big head wind, just like valuations of stocks being high is a head wind. What changed more recently was the availability of other alternatives which are superior diversifiers because of much higher expected returns. So I don't believe they needed/optimal any longer. Just better options available which were not available to the public (though to institutions) at the earlier time. So when learn something new, or have new developments I adopted to the change in circumstances. So I don't see any inconsistency here.

Inconsistency or flip flopping is when you change your view without changing facts or new circumstances. Would have for example recommended funds like LENDX and SRRIX back then if they were available without the 2/20 type fees charged by hedge funds.

Best wishes
Larry

Elysium
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Re: Cliff Asness: Liquid Alt Ragnarok?

Post by Elysium » Wed Sep 12, 2018 3:20 pm

larryswedroe wrote:
Wed Sep 12, 2018 2:57 pm
Elysium
Sorry if I misinterpreted your view but I got that view since you quoted this Elysium » Sun Sep 09, 2018 8:13 pm

AlphaLess wrote: ↑Sun Sep 09, 2018 5:38 pm
I don't trust Cliff Asness. Another snake oil salesman.

So I should have stated AlphaLess is the one with the problem. Again, my apology if I got that wrong.

As to your two points, I would still say Troutner was wrong about not including REITS. We want them in a portfolio but just no need to treat them as a separate asset class as their returns are well explained by other factors. And REITS not that tax inefficient since no migration of stocks across asset classes. So if going to own a broadly diversified portfolio own REITS within that portfolio (which is cheaper way to do so and avoids rebalancing) and if tilting should include REITS in the tilted portfolio. That would be my preference. Just don't treat as alternative/unique asset class.

Second, on the CCF, nothing changed about my view of CCF as diversifier of risks, it all had to do with valuations (contango) and the assumption that over time it would average zero, which was about historical average, the financialization may have changed that, or other issues such as supply might have changed that, and so we got in era of persistent contango and so that was a big head wind, just like valuations of stocks being high is a head wind. What changed more recently was the availability of other alternatives which are superior diversifiers because of much higher expected returns. So I don't believe they needed/optimal any longer. Just better options available which were not available to the public (though to institutions) at the earlier time. So when learn something new, or have new developments I adopted to the change in circumstances. So I don't see any inconsistency here.

Inconsistency or flip flopping is when you change your view without changing facts or new circumstances. Would have for example recommended funds like LENDX and SRRIX back then if they were available without the 2/20 type fees charged by hedge funds.

Best wishes
Larry
Hi Larry, Thanks for your response. I will pay more close attention to the materials on AQR strategy, however, personally for me I have become very risk averse towards anything other than long only stocks and bonds. This is because of the lessons learned from financial crisis, and the fact that bull market of last 10 years along with some saving and investing have built up a decent size portfolio that should meet my personal needs for retirement in another few years. So, at this point, I am skeptical of taking chances with a significant alloation to anything that I can't fully understand, or have a long term record. Other people may have different situations.

skeptical
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Re: Cliff Asness: Liquid Alt Ragnarok?

Post by skeptical » Wed Sep 12, 2018 4:29 pm

While I will probably get flack for being simple minded, here is how I benchmark ALT funds like QSPIX. I simply look at how the fund would have affected my current portfolio, as that is all I can test relative to what matters to me.

Using PortfolioVisualizer, I look for what I would consider a compelling improvement in the return/volatility tradeoff, sharpe ratio, and max drawdown.

My portfolio: 50% Total Stock, 50% Total Bond
ALT Portfolio: 40% Total Stock, 40% Total Bond, 20% ALTFUND

I have looked at many dozens of these ALT funds, with VMNFX and QSPIX being the better ones out there (that I have seen).

Vanguard Minimum Volatility, VMNFX, reduces volatility from 7% to 5.6% at a cost of .7% yearly returns, over past 18 years.

QSPIX brings down reduces volatility from 4.76% to 3.84% at a cost of .55% of return, over past 4 years

For me, this is not a compelling tradeoff, especially since my funds are mostly in taxable, and also, very few of these funds predate 2008.

If there is an ALT fund that is reasonable tax efficient, has been around through a couple of downturns, and makes a good improvement to my return/volatility numbers, I would love to hear about it.

grok87
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Re: Cliff Asness: Liquid Alt Ragnarok?

Post by grok87 » Wed Sep 12, 2018 5:13 pm

skeptical wrote:
Wed Sep 12, 2018 4:29 pm
While I will probably get flack for being simple minded, here is how I benchmark ALT funds like QSPIX. I simply look at how the fund would have affected my current portfolio, as that is all I can test relative to what matters to me.

Using PortfolioVisualizer, I look for what I would consider a compelling improvement in the return/volatility tradeoff, sharpe ratio, and max drawdown.

My portfolio: 50% Total Stock, 50% Total Bond
ALT Portfolio: 40% Total Stock, 40% Total Bond, 20% ALTFUND

I have looked at many dozens of these ALT funds, with VMNFX and QSPIX being the better ones out there (that I have seen).

Vanguard Minimum Volatility, VMNFX, reduces volatility from 7% to 5.6% at a cost of .7% yearly returns, over past 18 years.

QSPIX brings down reduces volatility from 4.76% to 3.84% at a cost of .55% of return, over past 4 years

For me, this is not a compelling tradeoff, especially since my funds are mostly in taxable, and also, very few of these funds predate 2008.

If there is an ALT fund that is reasonable tax efficient, has been around through a couple of downturns, and makes a good improvement to my return/volatility numbers, I would love to hear about it.
Tips? Reits?
Keep calm and Boglehead on. KCBO.

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Re: Cliff Asness: Liquid Alt Ragnarok?

Post by skeptical » Wed Sep 12, 2018 6:39 pm

grok - I have looked at TIPS, REITS, and other "standard" asset classes. TIPS do not seem to do much (though we have not gone through an inflationary environment with the current products, and I am considering them), REITS have a nice CAGR kick but at big increase in volatility (and a bunch of taxes that cut a lot of the increased CAGR).

But I put these in a different class - they have solid benchmarks, are "understandable" as to what they do and how they work. I can understand how they are useful to people.

For ALT's, there is no real way to benchmark as they are all different, and the internal mechanisms are, at least to me, opaque with regards to "do they work as advertised".

And I say this as an engineer who has have both a good math/stat background and have worked directly on a number of products that involve data analysis, modeling, and prediction of complex marketplaces. I used to be a lot smarter, however, after being involved with these projects whatever hubris I had has been stripped away, and I am now very skeptical about these mathematical approaches to the investment marketplace.

I am till curious as to what exists in the ALT product universe that can pass my simple sniff test. If an ALT fund cannot provide a better after tax CAGR and/or lower volatility, I am not sure why someone would want it in their portfolio.

grok87
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Re: Cliff Asness: Liquid Alt Ragnarok?

Post by grok87 » Wed Sep 12, 2018 7:19 pm

skeptical wrote:
Wed Sep 12, 2018 6:39 pm
grok - I have looked at TIPS, REITS, and other "standard" asset classes. TIPS do not seem to do much (though we have not gone through an inflationary environment with the current products, and I am considering them), REITS have a nice CAGR kick but at big increase in volatility (and a bunch of taxes that cut a lot of the increased CAGR).

But I put these in a different class - they have solid benchmarks, are "understandable" as to what they do and how they work. I can understand how they are useful to people.

For ALT's, there is no real way to benchmark as they are all different, and the internal mechanisms are, at least to me, opaque with regards to "do they work as advertised".

And I say this as an engineer who has have both a good math/stat background and have worked directly on a number of products that involve data analysis, modeling, and prediction of complex marketplaces. I used to be a lot smarter, however, after being involved with these projects whatever hubris I had has been stripped away, and I am now very skeptical about these mathematical approaches to the investment marketplace.

I am till curious as to what exists in the ALT product universe that can pass my simple sniff test. If an ALT fund cannot provide a better after tax CAGR and/or lower volatility, I am not sure why someone would want it in their portfolio.
so i tried your approach on portfolio visualizer.
https://www.portfoliovisualizer.com/bac ... sisResults
started wtih 30/20/50 us stock/international-stock/total-bond
then did 25/15/40/10/10 us stock/international stock/total-bond/reits/tips

cagr improves from 5.56% to 6.16% and worst year increases only slightly from -17.41% to -17.84%
Keep calm and Boglehead on. KCBO.

larryswedroe
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Re: Cliff Asness: Liquid Alt Ragnarok?

Post by larryswedroe » Wed Sep 12, 2018 7:22 pm

Elysium
Just thought for you. Funds like QSPRX and QRPRX actually reduce the concentration of risk that typical stock and bond portfolio has. See my book Reducing the Risk of Black Swans which discusses the ideas behind risk parity type strategies. So IMO using funds like AQR's style and risk premia funds is actually the conservative choice. I won the game 25 years with sale of company I worked for and became more and more conservative, and adding the alts I have IMO have greatly reduced the risk of portfolio from total risk perspective, including inflation risks.

Now of course I have far greater transparency and access to information than you do so I can be more confident.

Skeptical
Funds like LENDX and SRRIX or Pioneer's fund are both very simple and pass any sniff test.
Larry

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Re: Cliff Asness: Liquid Alt Ragnarok?

Post by Theoretical » Wed Sep 12, 2018 8:25 pm

skeptical wrote:
Wed Sep 12, 2018 6:39 pm
grok - I have looked at TIPS, REITS, and other "standard" asset classes. TIPS do not seem to do much (though we have not gone through an inflationary environment with the current products, and I am considering them), REITS have a nice CAGR kick but at big increase in volatility (and a bunch of taxes that cut a lot of the increased CAGR).

But I put these in a different class - they have solid benchmarks, are "understandable" as to what they do and how they work. I can understand how they are useful to people.

For ALT's, there is no real way to benchmark as they are all different, and the internal mechanisms are, at least to me, opaque with regards to "do they work as advertised".

And I say this as an engineer who has have both a good math/stat background and have worked directly on a number of products that involve data analysis, modeling, and prediction of complex marketplaces. I used to be a lot smarter, however, after being involved with these projects whatever hubris I had has been stripped away, and I am now very skeptical about these mathematical approaches to the investment marketplace.

I am till curious as to what exists in the ALT product universe that can pass my simple sniff test. If an ALT fund cannot provide a better after tax CAGR and/or lower volatility, I am not sure why someone would want it in their portfolio.
I’d look into high volatility systematic managed futures programs. A lot of the original CTAs have exactly your background - Bill Dunn of Dunn Capital in particular. The reason for high vol is that you need less of it to be a diversifier, even if it’s tax inefficient. There are mutual funds available that hit 15%+ volatility, and the positively skewed returns means there tend to be small losses (with some pretty big drawdowns) but made up for very quickly by spectacular gains.

I think one of the things you’ve hit on is that a vol of 5-10% is just going to look like expensive bonds. Even gold, which has a 0 real return and a negative one with the ER, is a powerful diversifier simply because it is ultra-volatile.

Or try VMOT from Alpha Architect, which has a trend following overlay on a value and momentum fund that uses two signals and two markets and is ultra transparent as to methodology.

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Re: Cliff Asness: Liquid Alt Ragnarok?

Post by Jeff Albertson » Wed Sep 12, 2018 8:54 pm

For a non-fringe view of what caused the housing crisis, see calculatedriskblog.com -
https://www.calculatedriskblog.com/2017 ... using.html

grok87
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Re: Cliff Asness: Liquid Alt Ragnarok?

Post by grok87 » Thu Sep 13, 2018 6:01 am

Jeff Albertson wrote:
Wed Sep 12, 2018 8:54 pm
For a non-fringe view of what caused the housing crisis, see calculatedriskblog.com -
https://www.calculatedriskblog.com/2017 ... using.html
Interesting
Here’s a direct link

https://www.cbsnews.com/news/heres-what ... ng-crisis/
Keep calm and Boglehead on. KCBO.

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Re: Cliff Asness: Liquid Alt Ragnarok?

Post by larryswedroe » Thu Sep 13, 2018 8:53 am

That article is really poor, missing so much of what caused the problem.
It totally misses the huge frauds in appraisals that allowed for much of the problem to happen and the total failure of state mortgage banking regulators to do anything about it, even though it was well known what was occurring.
It totally misses that agency issues at the rating agencies led them to give investment grade ratings to junk because by giving the rating that allowed the investment banks to sell them based on the rating. Without that the crisis never happens.
It totally ignores the SEC failure to regulate the now public investment banks which when they were partnerships, playing with only their partners money, leveraged at very low rates, like 3-4x. But once public it changed the agency risks so I think they all levered up above 10x and some like Lehman and perhaps Merrill if memory serves were up around 30. SEC had power to limit their leverage.
and of course Fannie and Freddie blew up because of the political push to approve less credit worthy loans. They pushed the goal persistently while I was in that business from I think 20% up to like 70%, again if memory serves.

This article IMO shows almost a total lack of what really happened and caused/allowed the crisis to occur. Just the rating agency issue alone would have prevented most of the damage. It literally makes no sense for originators to pay for the ratings because you have conflict. It should be the buyers of the product that pay for rating. I would note that producers of product would shop ratings agencies to see who would give them the highest rating with the lowest "B" piece that supported the rating.

Just think, if the SEC had limited leverage at investment banks to say 10:1 even then Lehman likely doesn't fail, Merrill doesn't have to be rescued and there is no crisis. Yet this is totally ignored by the article.

Note that with corporate bonds and munis you don't have the same rating agency issues you have with Asset backed securities where phony high ratings leads to more creation. Municipalities don't borrow more if they have higher rating, and companies similarly don't have capital needs change by much if at all if get higher rating---they just might shift from debt to equity but don't raise more capital typically.

This agency issue has never been addressed even though it was perhaps the major cause of the crisis.

Larry

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nedsaid
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Re: Cliff Asness: Liquid Alt Ragnarok?

Post by nedsaid » Thu Sep 13, 2018 11:09 am

larryswedroe wrote:
Thu Sep 13, 2018 8:53 am
That article is really poor, missing so much of what caused the problem.
It totally misses the huge frauds in appraisals that allowed for much of the problem to happen and the total failure of state mortgage banking regulators to do anything about it, even though it was well known what was occurring.
It totally misses that agency issues at the rating agencies led them to give investment grade ratings to junk because by giving the rating that allowed the investment banks to sell them based on the rating. Without that the crisis never happens.
It totally ignores the SEC failure to regulate the now public investment banks which when they were partnerships, playing with only their partners money, leveraged at very low rates, like 3-4x. But once public it changed the agency risks so I think they all levered up above 10x and some like Lehman and perhaps Merrill if memory serves were up around 30. SEC had power to limit their leverage.
and of course Fannie and Freddie blew up because of the political push to approve less credit worthy loans. They pushed the goal persistently while I was in that business from I think 20% up to like 70%, again if memory serves.

This article IMO shows almost a total lack of what really happened and caused/allowed the crisis to occur. Just the rating agency issue alone would have prevented most of the damage. It literally makes no sense for originators to pay for the ratings because you have conflict. It should be the buyers of the product that pay for rating. I would note that producers of product would shop ratings agencies to see who would give them the highest rating with the lowest "B" piece that supported the rating.

Just think, if the SEC had limited leverage at investment banks to say 10:1 even then Lehman likely doesn't fail, Merrill doesn't have to be rescued and there is no crisis. Yet this is totally ignored by the article.

Note that with corporate bonds and munis you don't have the same rating agency issues you have with Asset backed securities where phony high ratings leads to more creation. Municipalities don't borrow more if they have higher rating, and companies similarly don't have capital needs change by much if at all if get higher rating---they just might shift from debt to equity but don't raise more capital typically.

This agency issue has never been addressed even though it was perhaps the major cause of the crisis.

Larry
Hi Larry. I agree with your comments above. I read the article that Grok linked to and I just sort of wondered what planet that guy was on.

Freddie Mac and Fannie Mae were a big problem. For one thing, lending standards went down. Secondly, they packaged loans and sold to investors, mixing the good stuff with the bad stuff. The Fannie Mae CEO was fired for backdating records to inflate asset size and to achieve an illusion of growth. It was fraud, pure and simple, and the CEO was never prosecuted. Thank goodness, I sold my Fannie Mae shares taking Warren Buffett's lead with Freddie Mac.

The Securities Exchange Commission in particular did a very poor job here as well.

Also a problem with Structured Investment Vehicles, where banks could park the subprime stuff off the balance sheet and disclose risks only with a footnote to the financial statements. My understanding is that when the subprime started going bad, this stuff made its way back on the balance sheet. It sounded a lot like what Enron was doing.

Clearly something was very, very wrong. To my knowledge, no one went to jail over the Financial crisis though it was clear outright fraud was being committed at different levels of the financial system. All the way from appraisers to the CEO of Fannie Mae. Some folks were out of jobs but otherwise little if any prosecution.

It also was a case of privatizing the profits and socializing the risks. This was particularly true of Fannie Mae and Freddie Mac. So pretty much, for CEOs of certain companies, it was heads I win, tails the taxpayers lose. I own a few financial stocks, the damage from the financial crisis was temporary for all of them except AIG. Took a bit hit in AIG, still own the stock, likely the damage there to shareholders is permanent. So three companies that took on a lot of risk: Freddie Mac, Fannie Mae, and AIG. There were plenty of others.

This is why the movie classic, The Producers, should be required viewing for every business school graduate. The classic scam. It seemed like this crisis was "Springtime With Hitler" on steroids. Instead of being a Broadway Hit, "Springtime with Subprime" almost caused a second Great Depression. We probably don't want to know how close we came. It was scary.
A fool and his money are good for business.

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Re: Cliff Asness: Liquid Alt Ragnarok?

Post by larryswedroe » Thu Sep 13, 2018 11:16 am

Nedsaid
Agree completely and love the producers analogy

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Re: Cliff Asness: Liquid Alt Ragnarok?

Post by nedsaid » Thu Sep 13, 2018 11:40 am

larryswedroe wrote:
Thu Sep 13, 2018 11:16 am
Nedsaid
Agree completely and love the producers analogy
Hey Larry, I am starting up a new Broadway production. Do you want to invest? :wink: :wink:
A fool and his money are good for business.

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Re: Cliff Asness: Liquid Alt Ragnarok?

Post by HomerJ » Thu Sep 13, 2018 1:30 pm

vineviz wrote:
Wed Sep 12, 2018 11:20 am
The research used and/or published by firms like AQR, DFA, and Vanguard is rigorous in every conceivable way. Informed skepticism is fine, but attacks along the lines of "anything I don't understand is wrong until I understand it" don't really advance the discussion.
Economics is not a real science.

There is absolutely no way you can state for a fact that the research is rigorous in every conceivable way.
The J stands for Jay

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HomerJ
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Re: Cliff Asness: Liquid Alt Ragnarok?

Post by HomerJ » Thu Sep 13, 2018 1:55 pm

larryswedroe wrote:
Wed Sep 12, 2018 2:57 pm
So when learn something new, or have new developments I adopted to the change in circumstances. So I don't see any inconsistency here.
That's all well and good.

So what happens if you learn something new or there are new developments with these alt-funds? What if you learn these things AFTER years of underperformance, like you did with CCFs? Your view on the research behind CCFs was quite certain and strong, AT THE TIME.

No one is blaming you for not predicting the future correctly. There were unseen variables that you didn't see coming. It is indeed intellectually honest of you to change your view when new facts come up.

But shouldn't those experiences have taught you that you should be less certain when talking about the research on alt-funds? Since there were unseen variables in the past?
Last edited by HomerJ on Thu Sep 13, 2018 2:18 pm, edited 1 time in total.
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Re: Cliff Asness: Liquid Alt Ragnarok?

Post by marcopolo » Thu Sep 13, 2018 2:05 pm

HomerJ wrote:
Thu Sep 13, 2018 1:55 pm
What if you learn these things AFTER years of underperformance,
That is the part i still struggle with.
This has been an interesting conversation, and I have learned some new information.
But, a combination of two commonly repeated themes still gives me a lot of concern about this strategy:

1) These ALTs can underperform, often for long periods of time before they pay off with their uncorrelated returns, you just need to be patient.

2) When we discover new information about these ALTs, it is very reasonable to abandon them for a different strategy.

Both of those concepts make good sense in isolation. But, how do you reconcile the inherent contradiction between needing to be patient to reap the rewards, and the need to be willing to change strategies when encountering new information?
Once in a while you get shown the light, in the strangest of places if you look at it right.

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Re: Cliff Asness: Liquid Alt Ragnarok?

Post by vineviz » Thu Sep 13, 2018 2:10 pm

HomerJ wrote:
Thu Sep 13, 2018 1:30 pm
vineviz wrote:
Wed Sep 12, 2018 11:20 am
The research used and/or published by firms like AQR, DFA, and Vanguard is rigorous in every conceivable way. Informed skepticism is fine, but attacks along the lines of "anything I don't understand is wrong until I understand it" don't really advance the discussion.
Economics is not a real science.
I often hear this, but a familiarity with both economics and science is the best antidote to this misconception.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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HomerJ
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Re: Cliff Asness: Liquid Alt Ragnarok?

Post by HomerJ » Thu Sep 13, 2018 2:21 pm

vineviz wrote:
Thu Sep 13, 2018 2:10 pm
HomerJ wrote:
Thu Sep 13, 2018 1:30 pm
vineviz wrote:
Wed Sep 12, 2018 11:20 am
The research used and/or published by firms like AQR, DFA, and Vanguard is rigorous in every conceivable way. Informed skepticism is fine, but attacks along the lines of "anything I don't understand is wrong until I understand it" don't really advance the discussion.
Economics is not a real science.
I often hear this, but a familiarity with both economics and science is the best antidote to this misconception.
"real" science is a loaded term. Perhaps I shouldn't have used it. Economics is indeed a science, but what I mean is that it is naturally limited. One cannot say all variables are accounted for in economics, especially with human beings, and emotions, and changing laws. It's not a closed environment.

Think about repeatable trials and independent variables and limited data points.
The J stands for Jay

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Re: Cliff Asness: Liquid Alt Ragnarok?

Post by Elysium » Thu Sep 13, 2018 7:04 pm

nedsaid wrote:
Thu Sep 13, 2018 11:09 am
It also was a case of privatizing the profits and socializing the risks. This was particularly true of Fannie Mae and Freddie Mac. So pretty much, for CEOs of certain companies, it was heads I win, tails the taxpayers lose. I own a few financial stocks, the damage from the financial crisis was temporary for all of them except AIG. Took a bit hit in AIG, still own the stock, likely the damage there to shareholders is permanent. So three companies that took on a lot of risk: Freddie Mac, Fannie Mae, and AIG. There were plenty of others.
Regarding those two, you have to realize these were quasi govt agencies under instructions from a congress and a white house that wanted to promote maximum home ownership. Nearly everyone on wall street knew they are not really quasi govt agencies when it comes to the debt and when push comes to shove, govt will step in and back up the credit. This is why they were willing to buy billions of dollars in MBS issued by these two and enjoy the nice .5% yield boost over comparable treasuries. No one lost a penny on MBS issued by these two, as expected govt took over and protected the credit. Private profit public risk. The law makers pushed them to buy as much mortgages as can in secondary market. The models I talked about were built to get a certain expected result. I remember listening to a senior offier from capital markets talk about how robust the credit risk and interest rate risk models are, one of the very best in the industry it was claimed. However the threshold for failure was set at a level where there would be no housing price collapse beyond 15% (trying to recall from memory so not exact but approx.) and I remember asking someone so what if they drop below that and there is a probability it could. To that, I got no response or something like that ain't gonna happen. Some of the highly educated folks with MBA from Cornell were buying shares through paycheck deduction at 15% discount, and I recall asking once what if this company fail and stock price drop, and I got scoffs and are you this dumb kind of looks and the answer this company isn't going to fail. I was thinking of Buffett back then, and Greenspan who called out systemic risks in an address to congresss. But, anyway, what could a skeptical person do even if they have knowledge of what is going on but having no guarantee this is going to fail. I was skeptical, but not having 100% conviction I was right or when I will be right if ever. So, anyway, they were pushed by lawmakers and everyone was cheerful as there were lots of profits and backslapping going on. Until the thing hit the fan.

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Re: Cliff Asness: Liquid Alt Ragnarok?

Post by larryswedroe » Thu Sep 13, 2018 7:34 pm

What do you do when stocks underperform for very long periods? Nothing because you assume that the same risk story applies. Same would be true for example for reinsurance and alternative lending and variance risk premiums as they are all highly intuitive risks which require risk premiums and there are decades of evidence on all of them.
Larry

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Re: Cliff Asness: Liquid Alt Ragnarok?

Post by Elysium » Thu Sep 13, 2018 8:47 pm

I have read the material quite a bit, and I do understand what they are doing failry well enough. Here is the problem though for me. Even if we were to consider all the evidence for the factors to be present, how do we know the screens they employ are able to accurately select those displaying positive factors while avoiding the ones with negative factors, consistently, especially given there are so many factors to screen for both for positive and negative. This is were the problem comes in with the strategy, and even it's strongest proponents would start getting skeptical at time whether we are getting this right or not. There is no knowing, other than keep trusting the strategy. My question is, why take such a position, is it worth that much, unless you have plenty of fun money to play with.

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Re: Cliff Asness: Liquid Alt Ragnarok?

Post by nedsaid » Thu Sep 13, 2018 8:50 pm

Elysium wrote:
Thu Sep 13, 2018 7:04 pm
nedsaid wrote:
Thu Sep 13, 2018 11:09 am
It also was a case of privatizing the profits and socializing the risks. This was particularly true of Fannie Mae and Freddie Mac. So pretty much, for CEOs of certain companies, it was heads I win, tails the taxpayers lose. I own a few financial stocks, the damage from the financial crisis was temporary for all of them except AIG. Took a bit hit in AIG, still own the stock, likely the damage there to shareholders is permanent. So three companies that took on a lot of risk: Freddie Mac, Fannie Mae, and AIG. There were plenty of others.
Regarding those two, you have to realize these were quasi govt agencies under instructions from a congress and a white house that wanted to promote maximum home ownership. Nearly everyone on wall street knew they are not really quasi govt agencies when it comes to the debt and when push comes to shove, govt will step in and back up the credit. This is why they were willing to buy billions of dollars in MBS issued by these two and enjoy the nice .5% yield boost over comparable treasuries. No one lost a penny on MBS issued by these two, as expected govt took over and protected the credit. Private profit public risk. The law makers pushed them to buy as much mortgages as can in secondary market. The models I talked about were built to get a certain expected result. I remember listening to a senior offier from capital markets talk about how robust the credit risk and interest rate risk models are, one of the very best in the industry it was claimed. However the threshold for failure was set at a level where there would be no housing price collapse beyond 15% (trying to recall from memory so not exact but approx.) and I remember asking someone so what if they drop below that and there is a probability it could. To that, I got no response or something like that ain't gonna happen. Some of the highly educated folks with MBA from Cornell were buying shares through paycheck deduction at 15% discount, and I recall asking once what if this company fail and stock price drop, and I got scoffs and are you this dumb kind of looks and the answer this company isn't going to fail. I was thinking of Buffett back then, and Greenspan who called out systemic risks in an address to congresss. But, anyway, what could a skeptical person do even if they have knowledge of what is going on but having no guarantee this is going to fail. I was skeptical, but not having 100% conviction I was right or when I will be right if ever. So, anyway, they were pushed by lawmakers and everyone was cheerful as there were lots of profits and backslapping going on. Until the thing hit the fan.
Yes, I realize that Freddie Mac and Fannie Mae were quasi-governmental agencies. Pretty much the idea was to give the little guy a bit of a break on his mortgage and to help facilitate home ownership. Problem was mission creep and later pressure to expand home ownership pretty much at any cost. So what started as a good deal and a good example of private/public partnership instead became a hotbed for corruption. In other words, it got to be a honey pot for politicians.

So a good idea that went bad over time because of human greed. They just could not leave well enough alone. It was a betrayal of shareholders and it was a betrayal of the public. We trusted these organizations to serve the public and give the little guy a break and instead its mission was to line the pockets of connected people. The problem compounded because Wall Street figured out how to make a killing off of it too. I am all for capitalism and all for making money but shortcuts were taken and standards lowered. It was an accident just waiting to happen.

It isn't fair to blame this on one Administration. The problem had been building for over 30 years. Lots of little policy errors over time that built into a crisis. We forgot that for the system to work that you grant mortgages to people who can actually pay them back. Lots of blame to go around.
A fool and his money are good for business.

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Re: Cliff Asness: Liquid Alt Ragnarok?

Post by Elysium » Thu Sep 13, 2018 9:02 pm

nedsaid wrote:
Thu Sep 13, 2018 8:50 pm
Elysium wrote:
Thu Sep 13, 2018 7:04 pm
nedsaid wrote:
Thu Sep 13, 2018 11:09 am
It also was a case of privatizing the profits and socializing the risks. This was particularly true of Fannie Mae and Freddie Mac. So pretty much, for CEOs of certain companies, it was heads I win, tails the taxpayers lose. I own a few financial stocks, the damage from the financial crisis was temporary for all of them except AIG. Took a bit hit in AIG, still own the stock, likely the damage there to shareholders is permanent. So three companies that took on a lot of risk: Freddie Mac, Fannie Mae, and AIG. There were plenty of others.
Regarding those two, you have to realize these were quasi govt agencies under instructions from a congress and a white house that wanted to promote maximum home ownership. Nearly everyone on wall street knew they are not really quasi govt agencies when it comes to the debt and when push comes to shove, govt will step in and back up the credit. This is why they were willing to buy billions of dollars in MBS issued by these two and enjoy the nice .5% yield boost over comparable treasuries. No one lost a penny on MBS issued by these two, as expected govt took over and protected the credit. Private profit public risk. The law makers pushed them to buy as much mortgages as can in secondary market. The models I talked about were built to get a certain expected result. I remember listening to a senior offier from capital markets talk about how robust the credit risk and interest rate risk models are, one of the very best in the industry it was claimed. However the threshold for failure was set at a level where there would be no housing price collapse beyond 15% (trying to recall from memory so not exact but approx.) and I remember asking someone so what if they drop below that and there is a probability it could. To that, I got no response or something like that ain't gonna happen. Some of the highly educated folks with MBA from Cornell were buying shares through paycheck deduction at 15% discount, and I recall asking once what if this company fail and stock price drop, and I got scoffs and are you this dumb kind of looks and the answer this company isn't going to fail. I was thinking of Buffett back then, and Greenspan who called out systemic risks in an address to congresss. But, anyway, what could a skeptical person do even if they have knowledge of what is going on but having no guarantee this is going to fail. I was skeptical, but not having 100% conviction I was right or when I will be right if ever. So, anyway, they were pushed by lawmakers and everyone was cheerful as there were lots of profits and backslapping going on. Until the thing hit the fan.
Yes, I realize that Freddie Mac and Fannie Mae were quasi-governmental agencies. Pretty much the idea was to give the little guy a bit of a break on his mortgage and to help facilitate home ownership. Problem was mission creep and later pressure to expand home ownership pretty much at any cost. So what started as a good deal and a good example of private/public partnership instead became a hotbed for corruption. In other words, it got to be a honey pot for politicians.

So a good idea that went bad over time because of human greed. They just could not leave well enough alone. It was a betrayal of shareholders and it was a betrayal of the public. We trusted these organizations to serve the public and give the little guy a break and instead its mission was to line the pockets of connected people. The problem compounded because Wall Street figured out how to make a killing off of it too. I am all for capitalism and all for making money but shortcuts were taken and standards lowered. It was an accident just waiting to happen.

It isn't fair to blame this on one Administration. The problem had been building for over 30 years. Lots of little policy errors over time that built into a crisis. We forgot that for the system to work that you grant mortgages to people who can actually pay them back. Lots of blame to go around.
Very true. Do we have a similar story brewing at present with cutting of regulations, relaxing standards, and a glut created by tax reforms? Another calamity building up based on greed perhaps.

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Re: Cliff Asness: Liquid Alt Ragnarok?

Post by nedsaid » Thu Sep 13, 2018 9:24 pm

Elysium wrote:
Thu Sep 13, 2018 9:02 pm
nedsaid wrote:
Thu Sep 13, 2018 8:50 pm

It isn't fair to blame this on one Administration. The problem had been building for over 30 years. Lots of little policy errors over time that built into a crisis. We forgot that for the system to work that you grant mortgages to people who can actually pay them back. Lots of blame to go around.
Very true. Do we have a similar story brewing at present with cutting of regulations, relaxing standards, and a glut created by tax reforms? Another calamity building up based on greed perhaps.
Well, philosophically I am conservative. But I do realize there are limits to about anything. Lots of folks don't understand the concept of diminishing returns. At some point the rules can be so many that nobody reads or enforces them. On the other hand, there gets to be a problem when you deregulate too much. We don't want the Wild West out there.

We had plenty of laws, agencies, and regulations to deal with the conditions that created the financial crisis. Problem is people just didn't do their jobs. It seems like having the right people enforcing laws and regulations is more effective than just piling on more rules.

My feeling is that there needs to be regulatory review. See what is effective and what is not. It is a dynamic process. There is a happy medium out there, how much is too much and how little is too little? No one knows for sure, we just keep spinning the dial back and forth, sort of like setting a thermostat. One guy says it is too hot and turns it down. Someone else says it is too cold and turns it back up. That is the political process in a nutshell.

Are current policies setting up the next crisis? Hard to say. Hopefully the policies will be "just right." That is why it is important to look at things as objectively as we can and not get too ideological. Sometimes the other guy has some good ideas too.
A fool and his money are good for business.

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Re: Cliff Asness: Liquid Alt Ragnarok?

Post by Elysium » Thu Sep 13, 2018 10:10 pm

nedsaid wrote:
Thu Sep 13, 2018 9:24 pm
Elysium wrote:
Thu Sep 13, 2018 9:02 pm
nedsaid wrote:
Thu Sep 13, 2018 8:50 pm

It isn't fair to blame this on one Administration. The problem had been building for over 30 years. Lots of little policy errors over time that built into a crisis. We forgot that for the system to work that you grant mortgages to people who can actually pay them back. Lots of blame to go around.
Very true. Do we have a similar story brewing at present with cutting of regulations, relaxing standards, and a glut created by tax reforms? Another calamity building up based on greed perhaps.
Well, philosophically I am conservative. But I do realize there are limits to about anything. Lots of folks don't understand the concept of diminishing returns. At some point the rules can be so many that nobody reads or enforces them. On the other hand, there gets to be a problem when you deregulate too much. We don't want the Wild West out there.

We had plenty of laws, agencies, and regulations to deal with the conditions that created the financial crisis. Problem is people just didn't do their jobs. It seems like having the right people enforcing laws and regulations is more effective than just piling on more rules.

My feeling is that there needs to be regulatory review. See what is effective and what is not. It is a dynamic process. There is a happy medium out there, how much is too much and how little is too little? No one knows for sure, we just keep spinning the dial back and forth, sort of like setting a thermostat. One guy says it is too hot and turns it down. Someone else says it is too cold and turns it back up. That is the political process in a nutshell.

Are current policies setting up the next crisis? Hard to say. Hopefully the policies will be "just right." That is why it is important to look at things as objectively as we can and not get too ideological. Sometimes the other guy has some good ideas too.
Slightly off topic, but you know you are a financial junkie when you remember such things as where exactly were you when you heard Fed Chairman addressed the congress on the issue of GSE (Fannie, Freddie) and the systemic risk they present. I still remember where I was when I heard Greenspan warn about systemic risks these entities present, back in 2002, 5 years before the crisis materialized. Congress had 5 years to do something about that warning, and they did nothing, instead they kept fanning the flames. As an aside, even more off topic and possibly a taboo topic, I have lately stopped believing there is any meaning anymore to the conservative term as it was referred to in the past. I used to believe I am myself leaning that way, but figure it sort of has no meaning possibly these days.

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Re: Cliff Asness: Liquid Alt Ragnarok?

Post by larryswedroe » Fri Sep 14, 2018 8:04 am

elysium
Even if we were to consider all the evidence for the factors to be present, how do we know the screens they employ are able to accurately select those displaying positive factors while avoiding the ones with negative factors, consistently, especially given there are so many factors to screen for both for positive and negative.
We know because they are totally transparent on the portfolio construction rules and all the rules are based on published academic research. Now you can disagree with the strategy, or not have confidence in it, but we do know exactly what the fund is doing. And on top of that we have regular meetings going over attribution analysis with each of the fund managers to explain where the returns are coming from and why it has performed well or poorly


Now individual investors don't have the same access I do, and other advisory firms have, which makes knowing perhaps more difficult.
Larry

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Re: Cliff Asness: Liquid Alt Ragnarok?

Post by nedsaid » Fri Sep 14, 2018 8:47 am

larryswedroe wrote:
Fri Sep 14, 2018 8:04 am
elysium
Even if we were to consider all the evidence for the factors to be present, how do we know the screens they employ are able to accurately select those displaying positive factors while avoiding the ones with negative factors, consistently, especially given there are so many factors to screen for both for positive and negative.
We know because they are totally transparent on the portfolio construction rules and all the rules are based on published academic research. Now you can disagree with the strategy, or not have confidence in it, but we do know exactly what the fund is doing. And on top of that we have regular meetings going over attribution analysis with each of the fund managers to explain where the returns are coming from and why it has performed well or poorly


Now individual investors don't have the same access I do, and other advisory firms have, which makes knowing perhaps more difficult.
Larry
The academic research resonates with me because it is consistent with what I have observed with my own investments and is consistent with human nature and human behavior. It isn't like all of this stuff is way out there in left field. The limitations of academic research is that it is based upon past data and a belief that past market behavior is a good guide to what is probable in the future. Pretty much the academics are observing what people and markets actually do. So the best the research can do is help us to build more efficient portfolios and to tilt the odds in investors favor as much as possible but it cannot guarantee future performance.

To say that academic research has its limitations isn't the same as saying it is useless. Following the research, you are acting upon to what amounts to well informed and educated guesses with market history as a guide. It is vastly superior to making uninformed guesses.

There is also a good case for saying to heck with all of this and going with a simple Taylor Larimore 3 fund portfolio. Just taking the returns that the market gives you minus very minimal costs. John Bogle makes this case eloquently in his articles, speeches, interviews, and books.

It really boils down to which school of thought you belong. Factors vs. Market Cap weighted indexing.
A fool and his money are good for business.

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Re: Cliff Asness: Liquid Alt Ragnarok?

Post by Elysium » Fri Sep 14, 2018 8:49 am

larryswedroe wrote:
Fri Sep 14, 2018 8:04 am
elysium
Even if we were to consider all the evidence for the factors to be present, how do we know the screens they employ are able to accurately select those displaying positive factors while avoiding the ones with negative factors, consistently, especially given there are so many factors to screen for both for positive and negative.
We know because they are totally transparent on the portfolio construction rules and all the rules are based on published academic research. Now you can disagree with the strategy, or not have confidence in it, but we do know exactly what the fund is doing. And on top of that we have regular meetings going over attribution analysis with each of the fund managers to explain where the returns are coming from and why it has performed well or poorly


Now individual investors don't have the same access I do, and other advisory firms have, which makes knowing perhaps more difficult.
Larry
Larry, my trouble is not with their strategy, but on the factors they are operating on, with so many participants in the markets and so many variables involved, what if the underlying data set do not behave as expected over time, and when there is new and changing information. I guess what I am saying is, we know things like beta, term risk, etc are well established and followed by everyone over many market cycles over many years all over the world, and value / size, momentum etc less so, but willing to give it a try. Shorting the factors with negative attributes and betting on those with positive requires a very large leap of faith not only in the strategy, but on the underlying data set which may be beyond anyone's control.

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Re: Cliff Asness: Liquid Alt Ragnarok?

Post by larryswedroe » Fri Sep 14, 2018 9:17 am

Elysium
comes down to two things: how much do you trust the findings and can the fund execute as implementation costs matter a great deal . In Your Complete Guide to Factor Based Investing we lay out five important and all inclusive criteria before one should consider investing. With over 600 factors identified in the literature IMO there are only five equity factors that meet that criteria and one bond factor. So I would say we have been highly skeptical, throwing out 99% of the factor findings---note many of the others are subsumed by the five. Some factors I have more confidence in than in others, and they are the risk based ones, so I put more weight on them. Others like momentum, mostly try to eliminate the effects of negative momentum (big in value for obvious reasons).

So those are the judgments I've made. And also made judgments about how to implement. So for example lots of research showing changing nature of world means BTM not as good a value indicator as once was, especially in some industries. Which is one reason we moved from DFSVX to BOSVX (which uses multiple metrics)--others were much smaller size and deeper value.

I have absolutely no problem with people who say they are skeptical of the findings. But they must then recognize that they are going to have portfolios with concentration of risk in basically one single factor, market beta (even for typical portfolios like 60/40, it's like 90%). On other hand, if you believe that markets are efficient then all risky assets should have similar RISK ADJUSTED returns. Which means value and small stocks should have similar risk adjusted returns to TSM. So the only "harm" you might do by tilting is to incur slightly more expenses, in return for very least some diversification benefits--as we know the factors have historically low correlation to each other.

And then you have all the issues about things like lottery tickets and patient trading--which can be used to add value.

Finally, with alts like reinsurance, basically firms like Pioneer and Stone Ridge are basically running a reinsurance company for you (not buying an index of securities). And clearly reinsurance is a risk that commands a premium. The reinsurance industry has been around and highly profitable for over 150 years. And that risk/expected reward relationship isn't going to go away. Doesn't guarantee returns of course, but of course neither does TSM. And the potential dispersion is MUCH LESS with reinsurance than stocks and totally uncorrelated. The way I think about it is that if you look at historical data we expect return of say 7.5%, and rounding say cost is 2.5%. So you have gross return of 10% and net of 7.5%. That's a reinsurance company with 75% margin.
Same type thing with alternative lending where firms like stone Ridge and Colchis (very good long term record but LP form) and now RiverNorth are basically running a bank for you. IMO the right way to look at SR's expense ratio, adjusted for leverage which they don't charge for, is ER of about 1.4%. And let's say expect return of say 7% for simplicity. Again gross return of 8.4 and net of 7, or high profit margin (again don't have all the infrastructure costs that a bank has). While clearly some economic correlation risk, it's actually relatively low because loans are only prime. Even in 2008 banks made money on credit cards for example (and that includes lots of junk).
And of course the RVP has long history and clearly volatility is a risk which requires large premiums. I don't see how anyone could argue that the risk can be arbed away and that one should not expect a premium.

I hope that is helpful
larry

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